How to Use US Stocks and ETFs to Hedge Against Volatility in Indian Markets
There are multiple factors that cause market volatility. It is not always easy to protect one’s portfolio against such uncertain increase and decrease in values of securities. Forcing investors to be on their feet all the time, constantly on the lookout for any threat to their investments.
Everyone makes sure their electronics and cars are insured, though those are important, people often leave out to insure their portfolio. While not literal, hedging is one way an investor can actually insure their investments against market fluctuations.
Volatility in the markets is inevitable. But that does not mean that investors have no option but to let their investments nosedive into losses.
Apart from various investment products available among investors to hedge their portfolios, investing in US stocks and ETFs, is another method to insure against market volatility. We have most recently witnessed globally hedged portfolios perform better in November 2024, when the Indian stock market was declining and the US market was moving up.
What is Hedging?
Hedging is a risk management strategy designed to avoid the potential loss caused by market volatilities. It involves simultaneously taking a long and a short position in the same asset class to minimise or neutralise the effect of the fluctuating market, on the portfolio. An investor buys 1,000 Reliance shares and short-sells another 1,000. If the price rises, the bought shares gain value, if it falls, the shorted shares earn profit. This way, the investor benefits either way.
In practice hedging is a more complicated process. Similar to insurance, hedging carries a premium where the investor needs to pay extra to take a position. Popularly, hedging involves buying a put option or futures contract. Though in recent times the market has started presenting multiple options to investors to hedge against market volatilities. One such option is investing in foreign markets like the US.
Why invest in the US market?
Investing in a country like the US does not only protect the portfolio from market volatility and currency price fluctuations but also allows investors to invest in the world’s biggest and most valued companies of the world like Microsoft, Apple or Nvidia. Several fast growing companies that are riding the tech wave come from sectors in the US like AI, semiconductors, data centers and others. The country is widely considered a stable economy and the US dollar is one of the strongest currencies in the world, appreciating against the rupee by 3-4% annually.
Unlike earlier when Indian investors had to go through multiple hassles and complicated procedures to invest in the US markets, today trading apps like Appreciate, allow investors to enter US markets easily from the comfort of their phones. By completing the KYC (Know Your Customer) formalities from home - an investor can start their investment journey in a market that’s thousands of miles away.
Investors can consider US stocks and ETFs to diversify their holdings internationally and at the same time protect one’s portfolio from taking a hit in situations of uncertainty. On average US ETFs have returned investors 15% collectively in the last 5 years, and during this time the Indian currency fell by ₹14 against the US Dollar.
Conclusion
As investors, one should not always look at the markets from a narrow point of view. The macroeconomic state of a country heavily influences the activities of the markets. Therefore investors must take a wider perspective while getting involved in the markets. Diversifying one’s portfolio internationally serves as an excellent method to hedge your investments from market volatility. Fluctuations in the markets are ever present but the interesting part is that these are not present everywhere at the same time. And this is where Hedging using US Stocks and ETFs prove valuable for an investor.
While there is some correlation between various markets, and the Indian market sometimes reacts negatively to global cues, starting with an investment portfolio that is well diversified can perform better than one that is invested in just a single market. These and many other such reasons make investing in US stocks and ETFs a go-to approach to hedge against local market volatility.
