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The global stock market has been going through tough times lately due to the spread of coronavirus. Weeks of panic selling has sent the blue-chip stocks into a bear market territory in less than a month from peak to trough.
Notably, the Dow Jones Industrial Average tumbled more than 20% below the latest peak. It is currently down 20.3% from its Feb 12 high, while the S&P 500 and Nasdaq are down 19% each from their Feb 19 peaks. This marks the blue-chip index’s fastest move in 19 days from a record high to a bear market since 1931. With the latest wave of selling, the 11-year bull market has come to an end. Meanwhile, commodity prices, especially oil tanked and government bond yields plummeted to all-time lows in the face of the rapidly spreading coronavirus (read: Global Oil Price War Begins: ETFs in Focus).
The World Health Organization has declared the outbreak a pandemic. The disease has spread to 114 countries, infecting more than 118,000 people worldwide and causing over 4,100 deaths. President Donald Trump has suspended all travel from Europe to the United States for 30 days beginning Mar 13 midnight, with the exception of the United Kingdom. The latest developments have resulted in deteriorating fundamentals.
According to Goldman Sachs, supply chain disruptions due to the coronavirus will likely hit consumer spending and business activity. Deterioration in financial conditions will weigh heavily on global growth in the coming months. As such, Goldman lowered his year-end forecast for the S&P 500 and trimmed his profit estimates for the second time in a month. It expects the benchmark index to drop to 2,450 by the middle of 2020, representing a 28% slump from its February peak. Earnings will decline at least 12% in each of the next two quarters as plunging oil prices and the spread of the coronavirus hurts businesses (read: Shorting the S&P 500 with ETFs: What You Should Know).
The Organization for Economic Cooperation and Development (OECD), ratings agency Moody’s and other financial institutions have also lowered their global growth forecasts over the last few days. The OECD cut global GDP by 0.5% to 2.4% for this year while Moody’s revised down its global GDP expectations to 2.1% from 2.4%. Bank of America reduced 2020 global growth forecast to 2.8%, which marks the lowest reading since 2009.
Given the weak backdrop, some investors may want to tap the current bearish trend and prepare their portfolios to weather the coming storm. Fortunately, with the advent of ETFs, this is quite easy, as there are a few options available in the space that will allow investors to shield against adversities in a basket form with lower risk.
Below, we have highlighted five ETFs that could be used in a bear market. Each applies an interesting or unique methodology to protect investors, potentially shielding at least some part of the portfolio against continued bearishness:
This ETF adds alpha to an investment portfolio, especially during a bear market. DWSH is an actively managed ETF that short sells U.S. large-cap securities with the highest relative weakness within an investment universe primarily comprising large-capitalization U.S.-traded equities. It holds 102 stocks in its basket and charges higher annual fee of 3.07%. The product trades in moderate average daily volume of 70,000 shares and has accumulated $82.4 million in its asset base. It has gained nearly 25% in a month (read: 6 Equity ETFs Surviving the Market Correction).
The fund has a potential to generate positive returns regardless of the direction of the stock market as long as low beta stocks outperform high beta stocks. It invests in low-beta securities and at the same time shorts high-beta stocks of approximately equal dollar amounts within each sector. It seeks to deliver the spread return between low and high beta stocks. This can easily be done by tracking Dow Jones U.S. Thematic Market Neutral Anti-Beta Index. The ETF has AUM of $164.4 million and an expense ratio of 2.11%. It trades in average daily volume of 122,000 shares and has returned 8.9% in a month (read: ETF Strategies to Play the Rising Virus-Induced Volatility).
This fund seeks to mitigate significant downside market risk as it invests in a portfolio of "out of the money" put options purchased on the U.S. stock market. The TAIL strategy offers the potential advantage of buying more puts when volatility is low and fewer puts when volatility is high. While a portion of the fund's assets will be invested in the basket of long put option premiums, the majority of fund assets will be invested in intermediate term US Treasuries. The product has amassed $87.1 million in its asset base and charges 59 bps in annual fees from investors. It trades in average daily volume of 58,000 shares and has risen 12.8% in a month (read: Cambria Tail Risk ETF Hits New 52-Week High).
AGFiQ US Market Neutral Momentum Fund
This ETF provides exposure to the “momentum” factor by investing long in U.S. equities that have had above average total returns and shorting those securities that have had below average total returns. It follows the Dow Jones U.S. Thematic Market Neutral Momentum Index, charging investors 2.62%. The product has accumulated $1.4 million in its asset base while trading in average daily volume of 2,000 shares. It has gained 8% in a month.
Direxion Flight to Safety Strategy ETF
This ETF offers portfolio risk mitigation from equity market drawdowns while also providing long-term appreciation potential. By combining long-term U.S. treasury bonds, utility stocks, and gold bullion, it may act as a diversified ballast for portfolios while also acting as a source of uncorrelated returns. The fund charges 40 bps and trades in average daily volume of 14,000 shares. It has gathered $27 million in its asset base since its debut in early February. FLYT is up 7.2% in a month.
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Don't Fear the Bear: 5 ETFs to Bet on
The global stock market has been going through tough times lately due to the spread of coronavirus. Weeks of panic selling has sent the blue-chip stocks into a bear market territory in less than a month from peak to trough.
Notably, the Dow Jones Industrial Average tumbled more than 20% below the latest peak. It is currently down 20.3% from its Feb 12 high, while the S&P 500 and Nasdaq are down 19% each from their Feb 19 peaks. This marks the blue-chip index’s fastest move in 19 days from a record high to a bear market since 1931. With the latest wave of selling, the 11-year bull market has come to an end. Meanwhile, commodity prices, especially oil tanked and government bond yields plummeted to all-time lows in the face of the rapidly spreading coronavirus (read: Global Oil Price War Begins: ETFs in Focus).
The World Health Organization has declared the outbreak a pandemic. The disease has spread to 114 countries, infecting more than 118,000 people worldwide and causing over 4,100 deaths. President Donald Trump has suspended all travel from Europe to the United States for 30 days beginning Mar 13 midnight, with the exception of the United Kingdom. The latest developments have resulted in deteriorating fundamentals.
According to Goldman Sachs, supply chain disruptions due to the coronavirus will likely hit consumer spending and business activity. Deterioration in financial conditions will weigh heavily on global growth in the coming months. As such, Goldman lowered his year-end forecast for the S&P 500 and trimmed his profit estimates for the second time in a month. It expects the benchmark index to drop to 2,450 by the middle of 2020, representing a 28% slump from its February peak. Earnings will decline at least 12% in each of the next two quarters as plunging oil prices and the spread of the coronavirus hurts businesses (read: Shorting the S&P 500 with ETFs: What You Should Know).
The Organization for Economic Cooperation and Development (OECD), ratings agency Moody’s and other financial institutions have also lowered their global growth forecasts over the last few days. The OECD cut global GDP by 0.5% to 2.4% for this year while Moody’s revised down its global GDP expectations to 2.1% from 2.4%. Bank of America reduced 2020 global growth forecast to 2.8%, which marks the lowest reading since 2009.
Given the weak backdrop, some investors may want to tap the current bearish trend and prepare their portfolios to weather the coming storm. Fortunately, with the advent of ETFs, this is quite easy, as there are a few options available in the space that will allow investors to shield against adversities in a basket form with lower risk.
Below, we have highlighted five ETFs that could be used in a bear market. Each applies an interesting or unique methodology to protect investors, potentially shielding at least some part of the portfolio against continued bearishness:
AdvisorShares Dorsey Wright Short ETF (DWSH - Free Report)
This ETF adds alpha to an investment portfolio, especially during a bear market. DWSH is an actively managed ETF that short sells U.S. large-cap securities with the highest relative weakness within an investment universe primarily comprising large-capitalization U.S.-traded equities. It holds 102 stocks in its basket and charges higher annual fee of 3.07%. The product trades in moderate average daily volume of 70,000 shares and has accumulated $82.4 million in its asset base. It has gained nearly 25% in a month (read: 6 Equity ETFs Surviving the Market Correction).
AGFiQ US Market Neutral Anti-Beta Fund (BTAL - Free Report)
The fund has a potential to generate positive returns regardless of the direction of the stock market as long as low beta stocks outperform high beta stocks. It invests in low-beta securities and at the same time shorts high-beta stocks of approximately equal dollar amounts within each sector. It seeks to deliver the spread return between low and high beta stocks. This can easily be done by tracking Dow Jones U.S. Thematic Market Neutral Anti-Beta Index. The ETF has AUM of $164.4 million and an expense ratio of 2.11%. It trades in average daily volume of 122,000 shares and has returned 8.9% in a month (read: ETF Strategies to Play the Rising Virus-Induced Volatility).
Cambria Tail Risk ETF (TAIL - Free Report)
This fund seeks to mitigate significant downside market risk as it invests in a portfolio of "out of the money" put options purchased on the U.S. stock market. The TAIL strategy offers the potential advantage of buying more puts when volatility is low and fewer puts when volatility is high. While a portion of the fund's assets will be invested in the basket of long put option premiums, the majority of fund assets will be invested in intermediate term US Treasuries. The product has amassed $87.1 million in its asset base and charges 59 bps in annual fees from investors. It trades in average daily volume of 58,000 shares and has risen 12.8% in a month (read: Cambria Tail Risk ETF Hits New 52-Week High).
AGFiQ US Market Neutral Momentum Fund
This ETF provides exposure to the “momentum” factor by investing long in U.S. equities that have had above average total returns and shorting those securities that have had below average total returns. It follows the Dow Jones U.S. Thematic Market Neutral Momentum Index, charging investors 2.62%. The product has accumulated $1.4 million in its asset base while trading in average daily volume of 2,000 shares. It has gained 8% in a month.
Direxion Flight to Safety Strategy ETF
This ETF offers portfolio risk mitigation from equity market drawdowns while also providing long-term appreciation potential. By combining long-term U.S. treasury bonds, utility stocks, and gold bullion, it may act as a diversified ballast for portfolios while also acting as a source of uncorrelated returns. The fund charges 40 bps and trades in average daily volume of 14,000 shares. It has gathered $27 million in its asset base since its debut in early February. FLYT is up 7.2% in a month.
Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>