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5 ETF Plays for a Bear Market

Sweta Killa

Investors all over the world are panicking over a widely apprehended recession. This is especially true in the backdrop of a relentless slide in oil and persistent worries over the health of the world’s second largest economy.


Oil crashed to the lowest level not seen in more than 12 years with no sign of respite thanks to a growing supply glut and waning oil demand while China remained the major dampener of stock market returns, having reported the weakest annual growth in 25 years for 2015. Added to the woes are weak corporate earnings, slumping commodities, geopolitical tensions, a strong dollar, sluggishness in the other emerging markets like Brazil and Russia, and slowing growth in Japan and Europe (read: Market Fears Flare Up: Volatility ETFs on Edge).


Further, the U.S. economy, which was on a modest growth path, suddenly seems to have lost steam given the recent spate of weak data including sluggish manufacturing numbers, weak retail sales data, weak consumer-price data, and disappointing housing data. This indicates that the global slowdown has now started to hurt the slowly recovering U.S. economy. And, if the current headwinds persist, the decline in stock markets will aggravate into a prolonged bear market.


Moreover, the International Monetary Fund (IMF) also warned that the global economy is on the verge of another financial meltdown and subsequently slashed the global growth forecast for the third time in less than a year. The agency now expects the global economy to grow 3.4% this year and 3.6% in the next, both down 0.2% from the previous estimates. Earlier this month, the World Bank also cut its growth forecast for the global economy to 2.9% for this year from its previous projection of 3.3%, citing that slowdown in one of the big emerging market countries and a worse-than-expected slowdown in Brazil and Russia have worsened the already bleak global economic outlook.


Given a feeble 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 take guard against adversities in a basket form with lower risk.


Below, we highlighted five great 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 in the global economy (read: Top & Flop ETFs to Start 2016):

 

Ranger Equity Bear ETF (HDGE)


The ETF is actively managed and seeks capital appreciation by taking short positions in a number of U.S. listed companies with low earnings quality or aggressive accounting practices. Additionally, the managers will look to identify earnings-driven events that could be a catalyst for price declines such as downward earnings revisions or reduced forward guidance – the two factors that can signal trouble for a company. These securities having potentially weak fundamentals will underperform in a crumbling market, thereby resulting in strong profits for the fund.


This approach provides HDGE a tilt toward the consumer discretionary, industrial and information technology sectors that collectively make up for 76% of the portfolio. The fund has amassed $143 million in its asset base while trades in a good volume of around 261,000 shares a day on average. However, it is a bit pricey charging 2.90% in annual fees. The ETF has gained 13.7% so far this year.


QuantShares U.S. Market Neutral Anti-Beta Fund (BTAL)

 

In an uncertain market environment, focus on low beta stocks is usually warranted. These securities tend to be less volatile than the overall market and usually outperform when the market is plunging. An easy way to take advantage of this strategy is via BTAL. The fund invests in low beta securities while 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 the Dow Jones U.S. Thematic Market Neutral Anti-Beta Index (read: Low Beta Alternative ETFs for a Rocky Market).


This approach results in long and short positions in 200 stocks, in equal proportions. The fund charges 0.99% in fees per year and trades in a good volume of more than 139,000 shares per day. BTAL has accumulated $43.9 million in its asset base and is up 8.3% in the year-to-date timeframe.


WisdomTree Dynamic Bearish U.S. Equity Fund (DYB)


This fund recently debuted in the space, and utilizes long and short strategies by tracking the WisdomTree Dynamic Bearish U.S. Equity Index. The index takes long positions in equity or U.S. Treasury and short positions in only equity. The long equity position consists of 100 large and mid cap U.S. stocks having the best fundamental growth and value signals while the short equity position includes 500 U.S. stocks designed to act as a market risk hedge.


The product has amassed $4 million in its asset base since its debut a month ago while volume is light under 33,000 shares. Expense ratio came in at 0.48%. The ETF has returned 9.7% so far this year.


Direxion Daily Total Market Bear 1x Shares ETF (TOTS)


For a broad U.S. market play from a bearish perspective, TOTS seems an intriguing choice. This fund provides inverse exposure to the daily performance of the MSCI US Broad Market Index, which comprises all cap securities. The product is often overlooked by investors as depicted by its AUM of $2.1 million and average volume of under 4,000 shares per day. It charges a low annual fee of 65 bps and has gained 10.9% so far this year (see: all the Inverse Equity ETFs here).

 

iShares 20+ Year Treasury Bond ETF (TLT)


At the times of heightened global uncertainty, U.S. government bonds, especially the long-dated ones, act as safe havens. While there are several ETFs that could benefit when investors seek a flight to safety, the ultra-popular TLT might be a good option. It provides exposure to the long-term Treasury bonds by tracking the Barclays Capital U.S. 20+ Year Treasury Bond Index. It is the largest and most liquid ETF in the bond space with AUM of $7.4 billion and average daily volume of more than 8.6 million shares. Expense ratio comes in at 0.15%.


Holdings 24 securities in its basket, the fund focuses on the top credit rating bonds (AA+ and higher). The average maturity comes in 26.62 years and the effective duration is 17.50 years. The product has gained about 5% so far this year.


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ACTIVE-BEAR (HDGE): ETF Research Reports
 
QS-US MN AN-BET (BTAL): ETF Research Reports
 
WISTR-DY BR USE (DYB): ETF Research Reports
 
DIRX-D TM BR1X (TOTS): ETF Research Reports
 
ISHARS-20+YTB (TLT): ETF Research Reports
 
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