Protect Your Portfolio From Volatile Markets With This Strategy

If the second half of 2016 looks anything like the first, investors are in for quite a volatile equity market. 'Markets always have some volatility, but it's been increasing the last couple of years,' said Nardin Baker, chief strategist at Guggenheim Partners, a global investment firm with $240 billion in assets under management. 'Events seem to cause a spike in volatility, volatility may fall and then stay at a somewhat higher level than in the past.' While it's anyone's guess as to what those events are going to be, Baker said investors should be cautious about taking on too much risk right now. The VIX, Wall Street's fear index, which measures volatility, traded at an average of 18 year-to-date. On Friday, the VIX traded near 14.8. Its high for the year was 28.14, reached on Feb. 11, the same day the blue-chip Dow Jones Industrial Average hit its 2016 low of 15,660,18. At the start of 2016, worries about China's economy sparked worries of a global recession, leading to a markets swoon. To grapple with volatility Baker stressed the importance of an optimized volatility strategy, where a portfolio's holdings are altered based on various market conditions. 'With optimized volatility, we measure which stocks have been rewarded in the recent past: high risk ones or low risk ones,' Baker said. 'Then we find an optimized portfolio that tilts towards those either high risk or low risk ones - whichever is being rewarded.' Baker said this changes the portfolio's risk exposure, but only after the market has started to reward risk. Markets usually reward risk after major selloffs. 'You don't have to do anything in terms of making decisions - we are always measuring what the reward to risk is and the portfolio automatically shifts the exposure,' he said. Baker said investors can take part in this strategy through an exchange traded fund. Guggenheim offers the U.S. Large Cap Optimized Volatility ETF , which contains 120 S&P 500 names. Meanwhile, Baker is watching two factors for the remainder of 2016: the dollar's strength and interest rates. '[If the 10-Year Treasury yield] stays low at 1.5 percent, we're probably in for some slow [economic] growth,' he said. On Friday, the 10-Year yield fell to 1.385 percent, a record low, as investors continued to flood safe-haven government bonds, following the historic June 23 Brexit vote. Baker also doesn't expect the Federal Reserve to hike interest rates in 2016. 'If you look at future curves, the markets aren't forecasting much growth or much inflation,' he said. 'The Fed would like to raise rates, but they're not really compelled to at this time.' TheStreet's Scott Gamm reports from Wall Street. Subscribe to TheStreetTV on YouTube: http://t.st/TheStreetTV For more content from TheStreet visit: http://thestreet.com Check out all our videos: http://youtube.com/user/TheStreetTV Follow TheStreet on Twitter: http://twitter.com/thestreet Like TheStreet on Facebook: http://facebook.com/TheStreet Follow TheStreet on LinkedIn: http://linkedin.com/company/theStreet Follow TheStreet on Google+: http://plus.google.com/+TheStreet