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How to hedge volatility with ETFs

The initial sell-off in stocks was triggered by a sharp rise in U.S. bond yields late last week following the January jobs data, which shows wages increased at a faster rate since 2009. This has raised concerns over higher inflation that might force the Fed to adopt speedy rate hikes. Higher-than-expected rise in interest rates would lead to a rise in borrowing cost, thereby dulling the appeal for equities. Further, pick-up in economic growth across many developed and developing countries led to the prospect of an end to the cheap monetary policy era outside United States. All these are weighing heavily on the bull market, which is drawing closer to its ninth anniversary.

However, long-term equity fundamentals remain intact thanks to strong corporate earnings, higher consumer spending, rising consumer confidence as well as a new tax law enacted by President Donald Trump.

In order to exploit the encouraging trend amid volatility, investors should apply some hedge techniques to their equity portfolio. While there are a number of ways to do this, we have highlighted five volatility hedged ETFs that could prove beneficial amid market turbulence. Investors should note that these funds have the potential to stand out and might outperform the simple vanilla funds in case of rising volatility.

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