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Benefits of Futures: Portfolio Diversification

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The Benefits of Portfolio Diversification

One of the most important characteristics of any investment portfolio is its diversity. Portfolio diversification helps offset exposure in any single position, and helps investors protect themselves against wide swings in key sectors.

Typically, traders diversify by trading both equities and bonds. But in times of market volatility, a portfolio can greatly benefit by the addition of futures and options on futures contracts.

Futures and options on futures give market participants the opportunity to hedge against market risk by sector and to raise and lower levels of desired exposure in times of anticipated and unanticipated event-driven volatility.

Whether adjusting for economic announcements such as FOMC meetings, earning seasons or non-farm payroll numbers, or guarding against unexpected macro events, futures and options on futures can play a valuable role in hedging against risk and carefully calibrating market exposure.

Example

A market participant is invested in technology stocks and is looking to reduce exposure to expected announcements that can create price volatility. 

By taking a short position in the E-Mini NASDAQ futures market, and offsetting sector-specific exposure, a market participant can protect against short-term downside risk and offset potential declines around specific economic events.

Conclusion

Every investment portfolio is unique, and each trader’s diversification strategy should be carefully balanced to the portfolio’s requirements.

The wide range of liquidity in futures and options on futures contracts provide the flexibility to diversify any trading plan and can be personalized around each trader’s long-term investment goals. 

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The comments, views, and opinions expressed in the presentation are those of the CME Group. The content presented is intended for informational purposes only. Neither Charles Schwab Futures, Inc., nor Charles Schwab & Co., Inc., endorse nor can make a representation as to the accuracy, timeliness or completeness of the information presented.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice.

Hedging and protective strategies generally involve additional costs and do not assure a profit or guarantee against trading losses.

Futures trading offered and positions held through Charles Schwab Futures, Inc., a separate but affiliated company of Charles Schwab & Co., Inc. Both are subsidiaries of The Charles Schwab Corporation. Futures trading involves substantial risk and is not suitable for all investors. Please read Risk Disclosure Statement for Futures and Options.

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