Two Ways Back In
Perhaps some traders are looking to “tiptoe” back into the market and make some cautious purchases. Anyone seeking lower-volatility assets could consider two exchange-traded fund (ETF) sectors: Consumer Staples (XLP) and Healthcare (XLV). Both currently have lower volatility than the S&P 500.
The options market’s volatility—a statistical measure based on an option’s price—is ranked for ETFs in “Volatility take” (below). The greater the costs of the options, the greater the expected move of the ETF; while a cheaper option has only a small expectation of price movement. Hence XLP and XLV have “cheap” options, while Industrials (XLI) and Energy (XLE) have “expensive” options and therefore have a high expected movement.
Now, take a look at the movement of each of these indexes in the current market and in previous market declines. (See “Look to the past,” below.) In each one, Consumer Staples and Healthcare have been among the lowest-declining stocks.
It’s no surprise that sectors that decline less also tend to have lower volatility What isn’t known is how much the market will decline. So, any “tiptoeing” back into the markets would ideally be in slightly safer securities.
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