These ETFs provide safety in a bear market.
Wall Street hates nothing more than uncertainty, so it came as no surprise that the stock market stumbled last week as the presidential election polls tightened. The FBI’s renewed interest in Hillary Clinton’s emails resulted in a much tighter race as the possibility of a Trump White House grew larger. This jittery market has plenty of looming excuses — the election, the Brexit, fears of the next Fed rate hike — to correct violently out of a long-standing bull run. So if things do get ugly, where should you turn? Try one of these exchange-traded funds if you need to flee to safety.
iShares Gold Trust (ticker: IAU)
Economic uncertainty and political instability tend to spark demand for gold. So something like, say, a wild card in the White House could spark buying in the IAU. This ETF is similar to the more popular SPDR Gold Shares (GLD) in that it’s backed by real, physical gold. However, IAU represents 1/100th an ounce of gold versus GLD’s 1/10th — a benefit to institutional traders who pay per-share commissions. But IAU gets the nod because it charges 10 basis points less in fees than the GLD — a benefit to individual investors.
Expenses: 0.25 percent, or $25 annually on every $10,000 invested
VanEck Vectors Junior Gold Miners ETF (GDXJ)
Gold mining stocks, whose profitability is based on an “all-in cost” of actually mining gold, tend to move with gold, but in a more exaggerated fashion. This year, for instance, gold surged 26 percent from Jan. 1 through mid-August. And how did the Market Vectors Junior Gold Miners ETF (GDX) do? Up 125 percent. However, junior miners — smaller companies that explore for deposits and help get mines ready for production — are exploding, with the GDXJ up 165 percent. Junior miners tend to be more speculative, but more explosive when gold prices rise. Thus, they’re a more aggressive play for a gold-happy environment.
Expenses: 0.56 percent
iShares 20+ Year Treasury Bond ETF (TLT)
U.S. Treasurys are among the most secure investments on the planet, so they often are bid up in times of uncertainty. Longer-term bonds tend to be the most sensitive to rate movements and other stimuli, so if you expect a move into Treasurys, the TLT is an excellent choice. Yes, TLT hit an all-time high just months ago, and rates look far likelier to go up over the next year, not down. But if the economy takes a turn for the worse, or if the markets are displeased over America’s election choice, investors likely will hide for cover in long-term bonds.
Expenses: 0.15 percent
PowerShares S&P 500 Low Volatility Portfolio ETF (SPLV)
Another way to hunker down for a prolonged battle with the bears is to pile into big, stable blue chips. And stability is the key — even some large, financially sound companies tend to succumb to momentum, and you don’t want that when momo is leading the pack lower. The SPLV offers investors protection in the form of a 100-stock basket of holdings like Waste Management (WM) and PepsiCo (PEP) that not only belong to the Standard & Poor’s 500 index, but also have exhibited lower volatility than their blue-chip peers.
Expenses: 0.25 percent
PowerShares S&P 500 High Dividend Low Volatility Portfolio (SPHD)
One small quibble with the SPLV is that despite its focus on the most stable of blue chips, the yield — currently 2.1 percent — is no better than that of the S&P 500 itself. If you want a little more protection in the form of income, PowerShares also offers the SPHD, which yields 3.4 percent and offers comparable price performance to the SPLV to boot. This portfolio pulls back on utilities and financials and goes heavier into real estate holdings such as HCP (HCP) and tech holdings such as Garmin (GRMN).
Expenses: 0.3 percent
Global X JPMorgan U.S. Sector Rotator Index ETF (SCTO)
If you want a fund that will do some of the work for you, there’s the SCTO, which adjusts its weight in two directions depending on the market environment. In up markets, SCTO will use its momentum-based strategy to rotate into certain sectors and capture upside. When the going gets tough, though, SCTO will get going … straight into short-term Treasurys. Up to the entire weight of the fund, if necessary. Right now, 40 percent of the fund is in 1- to 3-year Treasurys, while the rest is split among SPDR’s tech, utilities and energy Select Sector ETFs.
Expenses: 0.85 percent
ProShares Short S&P500 ETF (SH)
We recently discussed ProShares’ SH ETF as part of our look at blue-chip powerhouses. But unlike the rest of the funds featured there, SH is a short fund — that is, it aims to return -100 percent of the S&P 500’s daily performance. So, if the S&P 500 goes down 1 percent, the SH should return 1 percent. This fund is best used when you have a portfolio of long-term holdings that you expect will weather the storm (so you don’t want to sell them), but you want to hedge against short-term market declines and salvage some performance.
Expenses: 0.89 percent
Direxion Daily Small Cap Bear 3x Shares (TZA)
The TZA isn’t a hedge — it’s an aggressive way to make serious profits in a bear market. When investors’ confidence is shaken, more speculative, less financially secure small-cap stocks sell off the hardest. For instance, the Dow Jones industrial average sold off about 54 percent from its 2007 peak to 2009 trough, while the small-cap Russell 2000 lost closer to 60 percent. The TZA capitalizes on this nature by returning three times the inverse of the Russell 2000’s daily performance, which is how it ripped off 50 percent returns when the market choked in the first six weeks of 2016.
Expenses: 0.95 percent (includes 6-basis-point fee waiver)
iShares MSCI Europe Financials ETF (EUFN)
If you think we haven’t seen the last of the Brexit’s world-rattling effect, you might want to consider making a bet against European banks. The EUFN, which invests in European financial stocks such as HSBC Holdings (HSBC) and Allianz SE, lost nearly a quarter of its value in the immediate aftermath of the Brexit vote this June. The problem here is that there is no inverse ETF for this specific niche, so if you do want to play against the Brexit via the EUFN, you’ll have to short it, which carries its own risks.
Expenses: 0.48 percent
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9 ETFs to Buy When the Market Tanks originally appeared on usnews.com
