Protection and peace of mind.
It has been a year of fireworks. After a rosy start to 2018, big downside moves in early February included two 1,000-point drops in the Dow Jones industrial average that erased all those gains. After clawing back those gains, the market was held back by fears of a global trade war in early March after the Trump administration rolled out hasty tariffs. This uncertainty can be challenging. But thanks to a number of innovative ETFs, investors don’t have to depend on a market that moves up in a straight line. These nine ETFs can help even small investors hedge their investments like a pro, and operate as a kind of portfolio insurance against a downturn.
Direxion S&P 500 Bear 1X Shares (ticker: SPDN)
There is no shortage of funds that track the market by mirroring an index such as the Standard & Poor’s 500. But the techniques that allow investors to share in the success of an index can also allow them to invest in the opposite direction. That’s what you get with this Direxion fund, which goes up in equal proportion to how much the S&P goes down. That could be a great way to protect yourself if things go south for stocks. Of course, this “inverse” fund also goes down when the S&P 500 goes up. So in a market that’s moving higher, you can lose a bundle betting against the benchmark index.
ProShares Short QQQ (PSQ)
This fund is similar to the inverse S&P 500 fund, except that it moves in the opposite direction of the Nasdaq 100 index. Not all indexes are created equal, and over the last few years it has been clear that big tech names such as the FAANG stocks — that would be Facebook (FB), Apple (AAPL), Amazon.com (AMZN), Netflix and Google parent Alphabet (GOOG, GOOGL) — are providing the lion’s share of profits for most investors. If you’re particularly worried about hedging your bets against downside risks in Big Tech, this inverse Nasdaq fund is a good fit.
PowerShares S&P 500 Low Volatility Portfolio (SPLV)
What if you don’t necessarily want true downside insurance, but simply want to take a less aggressive stand against the market? In that case, consider this PowerShares fund designed to avoid the most volatile and fast-moving stocks on Wall Street. SPLV achieves this with a focus on stable large-cap stocks like utility and consumer staples companies. Top holdings include Coca-Cola Co. (KO) and Procter & Gamble Co. (PG). Just remember that while volatility is sometimes used to describe a drop in stocks, the term really just means significant movement in either direction. So a low volatility fund will go up slower in a roaring bull market.
AdvisorShares Ranger Equity Bear ETF (HDGE)
As the clever ticker symbol implies, HDGE allows investors to tap into a hedge-fund-like strategy via tactically shorting troubled stocks. Unlike the inverse funds on this list, which simply go down as their benchmarks go up, this ETF handpicks companies that should perform worse than their peers — and bets against them. Thanks to this tactical approach, HDGE is actually up about 4 percent year-to-date in 2018 while the broader market is pretty much flat. If you fear a drop, this fund may be a great way to protect your portfolio.
Cambria Tail Risk ETF (TAIL)
For those unfamiliar with the concept, “tail risk” can be broadly defined as the chance of rare events far outside the norm. This Cambria fund hedges against that, by investing in stable U.S. Treasurys and supplementing the portfolio with options trades that will profit if the stock market declines. Of course, the TAIL ETF has slowly declined since its inception in 2017 as those options have been on the wrong side of the rally. But if things roll over in a big way, investors may find comfort in the kind of insurance against declines that this ETF offers.
SPDR Gold Shares ETF (GLD)
Gold is considered a safe haven asset and a store of value in troubled times. Admittedly, gold hasn’t done very well in the last few years as the “risk on” trades have made investors a lot of money. But that’s perhaps the best argument for gold because that lack of correlation means the precious metal can hang tough if markets fall. Buying and storing gold bullion can be cumbersome. So the next best thing is this ETF that invests 100 percent of its assets in gold bullion, and whose share price almost exactly tracks the ups and downs of the precious metal.
Vanguard Short-Term Inflation Protected Securities ETF (VTIP)
Treasury inflation-protected securities, or TIPS, have struggled in the last several years. Part of that has been robust investor demand for other investments, but the biggest reason is inflation hasn’t topped 4 percent since early 2008. TIPS are a special kind of government bond indexed to inflation, so weak inflation means weak returns. Like gold, however, this characteristic may make it a great hedge given the talk lately of inflation concerns on Wall Street. This Vanguard fund is a cheap way to play the trend, and with a focus on short durations in TIPS you won’t have to worry beyond trends of the next year or two.
iShares 1-3 Year Treasury Bond ETF (SHY)
There’s nothing saying you have to worry about inflation in order to invest in short-term government debt. This fund has a simple strategy of buying U.S. Treasury bonds that mature in the next three years. Unfortunately, this fund doesn’t hold these bonds to maturity. That means as it sells out of older positions, the fund has seen some downward pressure in a rising interest rate environment. If you are looking to hedge against market declines and expect rates to remain relatively low, this may not be a bad bet to hedge your portfolio.
PIMCO Enhanced Short Maturity Active ETF (MINT)
This fund is a great hybrid between the safety of cash and liquidity of a bond fund, without putting all your eggs in one basket of U.S. government debt. With three quarters of this ETF’s assets having a duration of 12 months or less, you don’t have to worry about long-term disruptions in interest rates or the bond market. It adds up to a roughly 1.8 percent yield annually, along with a fund that has remained effectively flat for the last five or six years as these short-term bonds mature without a problem. That’s a little less than a high-yield savings account, but you get the benefit of liquidity in an ETF.
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