In case you haven’t noticed, the stock market is just now coming off after a pretty significant selloff. After hitting a record high last month, the S&P 500 fell more than 7% before today’s rebound, which still puts the broad-based index firmly in bear market territory.
Everything from the recent global Ebola outbreak and deflation spreading across Europe to conflicts in the Middle East and the Ukraine has made investors beyond jittery. It’s a lot of fodder for a bear market, and it’s all finally coming to a head.
While we most likely won’t see a repeat of the stock-market pain from the financial crisis and the Great Recession, the potential for 2014 to finish in the red is certainly growing.
And that means investors who already haven’t should be prepping themselves for a continued correction.
While certain stocks are more correction-resistant than others, one of the best ways to hedge against (and even profit from) a prolonged bear market is an exchange-traded fund or two, as ETFs offer a number of protective or bearish strategies that keep you well diversified, too.
Here are four of the best bear market ETFs to buy today:
Bear Market ETFs: ProShares Short S&P 500 ETF (SH)
Shorting stocks and index options can be a great way to profit or hedge losses in a bear market. After all, you’ll make money as prices for these assets fall.
However, for most investors, the idea of opening a margin account and dealing with options sounds too risky. And that’s where inverse ETFs like the ProShares Short S&P 500 (SH) come in.
SH seeks to provide a return opposite of the venerable S&P 500 for a single day — ergo, if the S&P 500 loses 1%, in theory, SH should return 1%. Due to daily rebalancing and compounding over time, those returns can look less and less like an exact opposite of the S&P 500, but still — should stocks continue to fall, the bear market ETF will rise.
Another benefit to using SH rather than physically shorting stocks is that you’re only risking the capital you invest. When you short, your losses aren’t capped — after all, stocks theoretically can go up for ever. The worst this fund can do is go to zero.
SH is a tad expensive, with expenses running 0.89%, or $89 per $10,000 invested. And for those investors who want a bit more excitement, ProShares offers a leveraged version of the fund — the ProShares UltraShort S&P 500 (SDS) — which offers double the inverse return of the S&P 500. (And naturally, double the risk.)
Bear Market ETFs: AdvisorShares Ranger Equity Bear ETF (HDGE)
Even if stocks truly have moved into a bear market, not all shares will perform ve truly moved into a bear market, over-time not all shares will perform badly. However, the “bad” firms will fall by the wayside. That’s where some active management can come in handy.
Like the previously mentioned ProShares funds, the AdvisorShares Ranger Equity Bear ETF (HDGE) shorts stocks. The difference is that the managers of this bear market ETF are free to move around the market to find the best candidates to short.
The fund’s managers select short positions based on various fundamental screens. These include such factors as low earnings and aggressive accounting practices. Top holdings currently include homebuilder D.R. Horton (DHI) and Harley-Davidson (HOG).
HDGE hasn’t been that great of a fund since its inception in 2011, but no surprise there — as a dedicated short fund, this ETF was bound to suffer as stocks swelled in value.
But the bear is here, and HDGE has bounced off its lows. More importantly, it could be a profitable choice going forward if this bearish looking market continues to play out.
The only downside? HDGE charges a whopping 3.29% in expenses thanks to the margin rates the fund must pay to short individual stocks.
Bear Market ETFs: PowerShares S&P 500 Downside Hedged ETF (PHDG)
Looking for a “one-stop shop” to ride stocks’ upside, while still hedging against the bear markets bite? The PowerShares S&P 500 Downside Hedged ETF (PHDG) could be for you.
This bear market ETF tracks the S&P 500 Dynamic VEQTOR Index, which is designed provide positive total returns regardless of market direction. To do this, PHDG uses various quantitative screens to shift its assets among equities, volatility futures and cash.
Currently, the fund is allocated 85% to equities in the S&P 500 and 15% toward volatility futures.
That mix of cash, VIX futures and exposure to the S&P 500 has helped PHDG migrate the recent downturn pretty well. The fund really hasn’t lost anything — only about 1.5% — since the market’s top on Sept. 18.
PHDG is a fairly cheap fund at just 0.4% in expenses.
Bear Market ETFs: Pimco Enhanced Short Maturity ETF (MINT)
Perhaps the best bear market protection is good ol’ cash. However, a money market mutual fund isn’t paying really anything these days. It can pay — albeit not that much — to go slightly farther out on the duration curve to pick up a few more basis points in yield.
A great ETF way to do that is the Pimco Enhanced Short Maturity ETF (MINT).
While Pimco has suffered at the loss of head honcho Bill Gross, MINT has been a shining star among their line-up. The $3.8 billion fund primarily invests in short-duration investment grade bonds- that includes both government and corporate issuers. Currently, MINT has 600 holdings and duration of 0.46 years. That makes a perfect substitute for cash in this bear market.
And for taking on a little more risk, investors get 0.7% in yield. Which seems like nothing, until you consider the average money market mutual fund is paying around 0.01% and the average bank savings account is paying just 0.05%.
Expenses for MINT run just 0.35% and trading volume remains swift. That liquidity is key for investors.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.