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Long/Short ETFs to Brave This Wild Market

Zacks Equity Research

What similarity between summer 2015 and winter 2016! The China-driven sell-off that crushed the global investing world last August-September suddenly starts chiming to start the New Year (read: China Crash Spoils New Year Mood: ETFs in Focus).

Basically, a wavering Chinese economy and the consequent burst of the Chinese stock market on the one hand and the Fed policy tightening as well as massive crashes in oil prices on the other sent the global markets in a state of plight. The contagion effect of the double whammy was strong enough to make global equities see the most horrible start to a year in 16 years.

Grave economic releases out of China and heightened volatility in its stock market caught the global markets off guard lately. There was a trading halt on the key Chinese bourses, with the indexes diving 7%, to start the New Year. The decline was the worst single-day performance since the 8.5% decline on August 24, 2015, which was the root of the global market rout last summer.

Hints of further shrinkage in the Chinese manufacturing sector in December were held responsible for the bloodbath in the market. The Caixin/Markit purchasing managers' index for China declined to 48.2 in December, representing the 10th successive month of factory output contraction. The data was worse than a prior 48.6 and well below the market’s expectation for 48.9.

Additionally, China’s central bank guided the yuan to a five-year low in off-shore trading on Wednesday, which raised expectations of further weakness in Chinese economy as well as sparked off fears of a currency war among export-centric Asian nations. If this was not enough, news of Saudi Arabia cutting off diplomatic ties with Iran joined China-led worries to start the year (read: ETFs to Move on Yuan Devaluation).

While investors somehow started to digest fears of a hard landing in China, things seemed unsteady even in the U.S. Despite the Fed liftoff in December, subdued inflation is still a concern.  From this global trend, we can easily say that the macroeconomic environment is anything but steady. Asian shares are approaching their largest weekly decline in over four years (read: 5 ETF Losers of 2015 Hoping for a Rebound in 2016).

Added to this, oil prices are stubbornly low, having slipped to below $34/barrel level lately on supply glut and global growth worries. The continued downward pressure on oil prices crushed several oil-rich nations during this course.  Brent crude tested an 11-year low while WT has seen a 7-year low in the first week of 2016 (read: Oil and Energy ETFs That Hit All-Time Lows).

For the top U.S. ETFs, investors saw SPDR S&P 500 ETF (SPY) lose over 5.8%, SPDR Dow Jones Industrial Average ETF (DIA) shed over 6% and PowerShares QQQ (QQQ) move down by 7.5% in the last five trading sessions (as of January 7, 2016).

So, it would be wise for investors to settle on safe ETFs while playing the U.S. Safety and value should be the investment mantra in this stormy market. If caution is the keyword, investors can take a look at these three long/short ETFs which beat the aforementioned broader U.S. ETFs in the first week of 2016.

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

Investors who want to shift their focus to investing in low beta stocks during this uncertain market environment can consider adding BTAL ETF to their portfolio. This fund tracks the Dow Jones U.S. Thematic Market Neutral Anti-Beta Total Return Index which is an equal weighted, dollar neutral, sector neutral benchmark. The index identifies the lowest beta stocks and goes long on them, while at the same time going short on the highest beta stocks (read: 3 Low Beta ETFs for a Choppy Market).
Like MOM, this fund also invests in equal dollar amounts for both the long and short positions, and looks to profit from the spread return between low and high beta stocks.  This is thin on AUM having amassed just $8.5 million in assets. The fund charges 99 basis points as expenses and gained 4% in the last five trading sessions (as of January 7, 2016).

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

The fund looks to track long equity positions or long U.S. Treasury positions & short equity positions. The long equity positions take care of about 100 U.S. large- and mid-cap stocks that satisfy eligibility criteria and have the best combined score based on fundamental growth and value signals. Stocks are weighted as per their volatility features. The short equity positions comprise the largest 500 U.S. companies designed to act as a market risk hedge. This 1.3-million fund charges 48 bps in fees and added 2.3% in last five trading sessions (as of January 7, 2016).

U.S. Market Neutral Momentum Fund (MOM)
The fund looks to track the performance of the Dow Jones U.S. Thematic Market Neutral Momentum Index. The target index is equal weighted, dollar neutral and sector neutral. The index takes the highest momentum stocks into account as long positions and the lowest momentum stocks as short positions, in almost equal measure within each sector. Thanks to its focus on momentum stocks, this low volatile ETF offers a nice return even in a bull market.

The basket of about 200 stocks that the fund is long on seeks to outperform the portfolio of about 200 stocks with short positions. Despite its solid strategy, the product has so far been overlooked by investors with AUM of $8.4 million. It charges a fee of 1.49% per year from investors and gained about 0.4% in the last one week.

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