My Pick for 2022: Sticking With Known-Knowns, Reducing Risk With ETFs

This decade has not been so much a roaring one, but rather, a hysterically shrieking venture. We have been riding a rollercoaster ride of ups and downs: the Covid-related economic halts, work-from-home-fueled shopping, the collapse and recovery of airlines, supply chain disruptions (remember the Ever Given's Suez Canal fiasco?), a turn to work-from-home thriftiness, the winding down of Quantitative Easing, the Great Re-openings and the Omicron-based re-closings, and Russia invading Ukraine and the resulting energy and commodity market chaos. Trying to forecast anything has been a fool's errand at best. That said, the one known known that is facing the markets currently is that interest rates have begun to rise and will continue to rise through the rest of this year and through most of 2023, based on the current Fed Fund futures montage, which is currently pricing in rates at 3% by the middle of next year. I Want to Avoid Equity Risk Regular readers will know that I tend to focus on thematic or strategy-focused funds and tend to shy away from broad-based offerings. Given the headwind presented by what looks increasingly like a series of half-point rate hikes coupled with investors' overall nervousness, it is becoming harder to find a truly safe haven for the short- to mid-term investors in these markets. Long-term investors? No problem, just another market cycle, nothing to see here. Some folks see the iShares 20+ Year Treasury Bond ETF as a potential safe haven, but a portfolio with a 19-year duration is going to take some pretty big hits as the Fed starts hiking rates 50-basis points at a clip. For folks who want to hide from equity volatility in fixed income land, I would point them to much shorter maturity products like the Wisdom Tree Floating Rate Treasury Fund or even the iShares 0-5 Year TIPS Bond ETF , which not only reduces the impact of rising rates but also will counter the destructive effects of historically high inflation -- assuming the Fed is unable to contain inflation through rate hikes. As the Fed was unable to generate inflation for all these years, I'm not entirely sure the Fed will be able to quash it in a couple of meetings, especially given how much it has expanded the money supply over the past decade. Maybe that's just me. I'd Rather Manage Equity Risk For those investors who still want exposure to stocks, but want to get some protection, I remind them of an article I wrote in January covering Defined Outcome ETFs. These funds provide broad market exposure with varying degrees of protection from losses by using a strategy known as a vertical spread overlay, usually a bear put spread. This options strategy is used by issuers to shield investors from a certain percentage of downside risk, depending on which issuer you end up using. These funds are generally set up to work over a one-year, forward-period, meaning that the most recent fund launches this past March look to provide downside protection through March 2023. The one thing investors must be aware of is that the downside protection offered starts from the first trading day of the fund, meaning that if you purchase a fund after it has been launched, some of the buffer may have already been used, so you may only have a fraction of that protection available to you from your purchase date. To help offset this issue, defined outcome trailblazer Innovator ETFs recently launched a new series of funds, including the Buffer Step-Up Strategy ETF , offering an initial 9% downside buffer, and the Power Buffer Step-Up Strategy , offering an initial 15% downside buffer. What is different about these funds is that in the event of a breach of the existing buffer (on the downside) or cap (on the upside) the funds will reposition themselves to extend the protection or cap accordingly. The funds are evaluated monthly, so depending on market action, you may end up feeling some pain before the spread is reestablished at the new levels, but unless correlations go to one (meaning it all goes to hell) that pain should be manageable. My Take The frequency and quality of unknown unknowns over the past two years have been taxing, if not ridiculous. And rising rates are generally not an investor's friend, but some of the funds presented here might help you better manage the upcoming future unpleasantness.

My Pick for 2022: Sticking With Known-Knowns, Reducing Risk With ETFs

Amid these wild ups and downs, let's check out several exchange-traded funds that could help shield investors from rising rates, crazy inflation and other investing potholes.

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