Unless you’ve been under a rock for months, you know that the markets have been on a tear since mid-November that has seen the S&P 500 clock nearly 12% gains and brought the Dow Jones near all-time highs.
Investors’ lust for stocks hasn’t gone unnoticed in mutual funds and ETFs. Stock-centered funds saw January inflows of about $77.4 billion — the highest amount since February 2000.
Naturally, the seemingly unconditional love for stocks — coupled with a few days of stalling — has many wondering whether the market is overheated and due for a correction or an even bigger setback.
If you’re convinced we’re ready to take a turn for the worse, it’s time to get defensive. If you want to dabble in mutual funds, there’s a number of funds out there that should provide a pretty big shield to hide behind:
SPDR Gold Shares
When the stock market gets shaky, some investors turn to gold — and there’s few easier ways to invest in the little yellow metal than the SPDR Gold Shares (NYSE:GLD) exchange-traded fund.
This ETF is actually backed by physical bullion — currently amounting to a whopping $71 billion — stored in vaults, with each unit representing a tenth of an ounce of gold.
Gold was one of the few asset classes to generate a positive return during the 2008-09 financial crisis, with GLD gaining nearly 5%. But as seen by its S&P-matching return since the depths of the crisis, GLD doesn’t need a weak market to achieve strong results.
GLD charges a low 0.4% in expenses.
PIMCO StocksPLUS TR Short Strategy
Short selling basically allows an investor to make a profit when a stock falls. It’s a practice that’s often subject to controversy and even scorn, but still, many of the world’s top investors — such as George Soros, Jim Rogers and Ray Dalio — engage in the practice.
Another avid short seller is the “Bond King” Bill Gross, manager of the PIMCO StocksPLUS TR Short Strategy (MUTF:PSSAX) fund, which takes a short position in the S&P 500.
As one would expect, the returns of a fund that goes short on the market have been miserable of late; PSSAX has lost 7% in the past year. But when markets fall, the PSSAX can provide some comfort. Case in point, 2008: While the S&P 500 plunged 41%, PSSAX ripped off 47% returns.
PSSAX charges 1.04% in expenses and requires a small minimum investment of just $1,000.
MutualHedge Frontier Legends
Managed futures programs — where advisers are trusted to manage money via futures contracts — have been around for decades. Because the investments are in broad categories like commodities and currencies, the returns tend to not be correlated with stocks.
While managed futures long have been a tool for professional traders and institutions, retail investors can get exposure to this strategy via funds such as the MutualHedge Frontier Legends Fund (MUTF:MHFAX), which parcels money out to about a dozen funds.
The fund is young — it only got its start in December 2011 — and the 2.7% average annual return since then is certainly lackluster. However, the goal for funds like this isn’t necessarily screaming returns, but low risk and loss mitigation. That said, returns are heavily weighed down by a high 2.38% expense ratio, as well as a negotiable 5.75% sales charge for A shares. Minimum investment is $2,500.
PowerShares S&P 500 Low Volatility
Low-volatility ETFs track indices featuring stocks that show more muted swings in their prices — the idea being that such stocks should fare better (or at least not dip as heavily as other companies) when the market swoons.
One popular low-vol ETF to consider is the PowerShares S&P 500 Low Volatility (NYSE:SPLV) fund. The portfolio consists of 100 stocks from the S&P 500 that have demonstrated low volatility over the past year.
Unsurprisingly, the fund is heaviest in utilities and consumer staples stocks — companies that provide things people need regardless of how good or bad the economy is. Top holdings, then, include consumer stocks such as Clorox (NYSE:CLX), General Mills (NYSE:GIS) and Johnson & Johnson (NYSE:JNJ), as well as power company Southern Co. (NYSE:SO).
Even with a focus on low volatility, the SPLV has matched the S&P 500 with roughly 13% gains over the past 52 weeks.
SPLV charges 0.25% in expenses and yields nearly 3% in dividends.
PowerShares S&P Emerging Markets Low Volatility
Same idea, different locale.
Those wanting to avoid U.S. stocks altogether can try another young fund, the PowerShares S&P Emerging Markets Low Volatility (NYSE:EELV). The EELV is based on the S&P BMI Emerging Markets Low Volatility Index, which represents countries such as South Africa (19.1%), Malaysia (14.5%), Taiwan (11%), Brazil (8.2%), Chile (8%), Thailand (6.7%) and South Korea (5.6%).
The biggest slice of the holdings pie (25%) goes to financials, with consumer staples and discretionary stocks and industrials also well-represented. Those stocks have helped EELV to a respectable 9% return in the past year.
EELV charges 0.29% in expenses.
Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He is also the author of “How to Create the Next Facebook” and “High-Profit IPO Strategies: Finding Breakout IPOs for Investors and Traders.” Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.