As we barrel towards theNiagaraFalls of all fiscal cliffs, investors seem fairly certain that additional volatility is in store for the next few months. What is less clear, however, are the strategies that can be effective in insulating portfolios from a surge in uncertainty-related volatility over the next several weeks . Inspired by some of the thoughts put together by the folks at iShares, we outline five strategies below for reducing overall risk and volatility in your portfolio, as well as some specific ETF options for each approach.

  1. Low Volatility Stocks:This approach is perhaps stunningly obvious, but it's worth highlighting given the innovations in the ETF industry in recent months that make implementation easier than ever. For investors expecting a rise in volatility and significant downside risk, low volatility stocks represent a way to scale back overall risk while still keeping skin in the game (ie, keeping overall equity exposure the same). There are a number of low volatility ETFs out there now; the PowerShares S&P 500 Low Volatility Portfolio is by far the most popular, but there are other options targeting developed and international markets outside the U.S .
  2. Mega Cap Stocks:Another option for investors looking to scale back risk while maintaining their existing equity allocation is mega cap stocks. While these companies aren't immune to uncertainty and volatility, they tend to exhibit greater stability than smaller companies. Because they generally have established operations and significant cash balances, mega caps can be a way to reduce overall volatility. Again, there are a number of mega cap ETF options here; funds such as OEF and MGK tap the U.S. market, while FEZ, IOO, DGT, and ADRE focus on international mega cap stocks.
  3. Hedge Fund Strategies:The idea of a hedge fund strategy might seem contradictory to risk reduction, but that relates to misconceptions about what hedge fund replication really seeks to achieve. The goal is not a risk on, shoot-for-the stars approach, but rather an attempt to reduce overall volatility and achieve returns that exhibit low correlation to stocks and bonds. Comparing the overall volatility of a product like the IQ Hedge Multi-Strategy Tracker ETF to SPY, for example, illustrates this point quite effectively. There are a number of hedge fund ETFs that offer relatively low volatility, making this alternative strategy potentially very appealing now .
  4. Precious Metals:The gold bugs may have their day yet; after slogging along for most of the year, precious metals prices have popped since the election. That could be a good indication that hard assetsspecifically gold and silverwill be the primary beneficiaries of any prolonged gridlock in Washington. There are a number of ETFs offering exposure to both gold and silver, as well as several broad-based precious metals funds.
  5. Cash:This represents the ultimate capital preservation approachwhich isn't necessarily a bad tactic in the current environment. Converting to cash or cash equivalents obviously minimizes the upsideespecially with rates near zerobut takes almost all the risk off the table along with it. Before rushing to put your money under the mattress, consider one of the several money market ETFs that offers modest yield opportunities.

Disclosure: No positions at time of writing.

Related Articles
  1. Mutual Funds & ETFs

    The 4 Best Buy-and-Hold ETFs

    Explore detailed analyses of the top buy-and-hold exchange traded funds, and learn about their characteristics, statistics and suitability.
  2. Chart Advisor

    Bumpy Roads Ahead In Transportation

    Investors are keeping an eye on the transportation industry. We'll take a look at the trend direction and how to trade it.
  3. Investing

    How ETFs May Save You Thousands

    Being vigilant about the amount you pay and what you get for is important, but adding ETFs into the investment mix fits well with a value-seeking nature.
  4. Mutual Funds & ETFs

    3 Fixed Income ETFs in the Mining Sector

    Learn about the top three metals and mining exchange-traded funds (ETFs), and explore analyses of their characteristics and how investors can benefit from these ETFs.
  5. Chart Advisor

    Agriculture Commodities Are In The Bear's Sights

    Agriculture stocks have experienced strong moves higher over recent weeks, but chart patterns on sugar, corn and wheat are suggesting the moves could be short lived.
  6. Investing News

    Top Tips for Diversifying with Mutual Funds

    Are mutual funds becoming obsolete? If they have something to offer, which funds should you consider for diversification?
  7. Professionals

    Top Stocks to Short, Go Long On to Beat the Market

    A long/short portfolio can help weather a variety of market scenarios. Here's how to put one together.
  8. Mutual Funds & ETFs

    Top 4 Asia-Pacific ETFs

    Learn about four of the best-performing exchange-traded funds, or ETFs, that offer investors exposure to the Asia-Pacific region.
  9. Stock Analysis

    The Biggest Oil Producers in Asia

    Learn which Asian countries deliver the most crude oil to market, and discover what companies are the biggest producers in each country.
  10. Mutual Funds & ETFs

    Top 3 Japanese Bond ETFs

    Learn about the top three exchange-traded funds (ETFs) that invest in sovereign and corporate bonds issued by developed countries, including Japan.
  1. Can mutual funds invest in IPOs?

    Mutual funds can invest in initial public offerings (IPOS). However, most mutual funds have bylaws that prevent them from ... Read Full Answer >>
  2. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  3. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  4. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  5. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
  6. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!