Wells Fargo Says Favorite Coronavirus Hedge Is Still Cheap
Wells Fargo Says Favorite Coronavirus Hedge Still Looks Cheap
(Bloomberg) -- Bearish bets on an exchange-traded fund of developed-market stocks outside the U.S. and Canada are proving their worth as a coronavirus hedge, according to Wells Fargo & Co.
Put options on the iShares MSCI EAFE ETF performed best during the February 19-24 sell-off, rising more than six times in value and outperforming those of other major ETFs like the SPDR S&P 500 ETF Trust, iShares Russell 2000 ETF and Invesco QQQ Trust Series 1, equity-derivatives strategist Pravit Chintawongvanich wrote in a note Tuesday. Cboe Volatility Index call options performed worst, he said.
“For downside hedges, favor EFA puts as a coronavirus/global growth hedge, and SPY and IWM over QQQ for a general U.S. equity hedge,” Pravit wrote, referring to the tickers for the funds.
Calls on the VIX fare poorly in comparison other strategies because they’re consistently too expensive on a volatility basis, he said. Even with a large player known as “50 Cent” building a major position in VIX options, the rise in volatility from the stock sell-off wasn’t enough to make the calls outperform other hedges, he added.
Pravit is sticking with his recommendation.
“EFA puts remain the best hedge owing to their relatively cheap volatility and consistent performance during serious sell-offs,” he said. “IWM puts are a close runner-up,” as the small-cap ETF is likely to “catch up to the downside if the sell-off becomes more serious.”
--With assistance from Rita Nazareth.
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