Hedging a specific stock position has become a lot easier with the advent of “sector ETFs.” Stocks are categorized into sectors, and each sector now has a highly liquid ETF that tracks its performance. Use these ETFs to hedge stock positions within your portfolio.

Assume you have a significant position in Apple (AAPL), Google (GOOG) or Cisco Systems (CSCO), or any other technology sector stock. If you still like the stock and don’t want to sell it, but you’re worried about a short-term pullback (or just want to reduce the volatility of the position) short-sell or buy put options on the Technology Select Sector SPDR (XLK). If your tech stock declines, it is quite likely the sector ETF will also decline, making you money on your short position and offsetting the loss on your long stock position.

The strategy can be applied to nearly any stock that has some correlation with its sector, as there is a sector ETF that tracks almost every stock.

Even though a stock is part of a sector, it may not always move with the sector. In this case, the “long stock-short ETF” strategy may not effectively hedge the position.

Inflation Hedging

Inflation is a cause for concern among investors; it dwindles their buying power, and their stock returns may not compensate them for it. Since inflation is an increase in prices, many commodities appreciate during inflationary times. Therefore, investors can buy commodities as a hedge against inflation—the rise in commodity prices is likely to fully or partially offset the loss in buyer power.

Research by AllianceBerstein indicates “published spot commodity prices date back at least to the 1800s and confirm that on average, commodity prices appreciate in line with broad inflation measures.”

Precious metals are a common selection, and the SPDR Gold Shares (GLD) and iShares Silver Trust (SLV) give investors easy access to the commodities. An alternative is the DB Base Metals Fund (DBB), which provides exposure to copper, zinc and aluminum, all widely used in various industries. The fund is likely to rise under inflationary pressures, with a decline signifying little inflation pressure.

Investors can also short a bond fund in an attempt to compensate for inflation. Bond prices fall as interest rates and inflation rises; therefore, shorting a fund such as the Core Total U.S. Bond Market ETF (AGG) can compensate investors when inflation begins to rise aggressively.

Buying the Barclays TIPS Bond Fund (TIP) can also offset inflation, as the fund is designed to protect investors from inflation. TIP invests in Treasuries that rise and fall with the Consumer Price Index (CPI). Since Treasuries pay less interest than traditional corporate bonds, the fund is likely to act as a partial hedge, and not entirely compensate investors for the rise in real prices (inflation) they are experiencing.