How to Hedge Your ETF Bets for a Seasonally Weak September

NEW YORK (Fabian Capital Management) -- Investors in exchange-traded funds are, no doubt, concerned about the modest slide stocks have begun this month turning into a more serious selloff.

This uncertainty becomes even more heightened by the fact that September is historically the weakest month of the year. According to recent data published by Yardeni Research, September has had an average annual return of -1.00% since 1928. That's certainly not an inspiring statistic even in light of the resilience in stocks over the last several years.

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While I don't recommend making changes strictly in adherence to monthly average returns, a portfolio that is fully invested may want to make some subtle shifts if additional volatility picks up. That may include adding a traditional inverse position to hedge existing longs, moving a portion of the portfolio to cash or swapping out high-beta sectors for more defensive positions.

Hedging a portfolio of existing longs can be a useful strategy to protect gains of highly appreciated positions. However, it can often be difficult to execute if you are not highly disciplined with your entry point and risk parameters. Most investors opt to accomplish this feat by using options or shorting individual securities. However, those methods may not be available in an IRA or similar retirement account.

One potential alternative is to use an inverse ETF such as the ProShares Short Russell 2000 ETF  (RWM) . This fund seeks to provide investment results that correspond to the inverse price movement of the Russell 2000 index on a daily basis. The underperformance of the iShares Russell 2000 ETF  (IWM) has been well documented this year and continues to be a thorn in the side of small-cap investors. If the markets do roll over, this small-cap index may find itself re-testing its 2014 lows.

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