While this month hasn’t been a horrific one for stocks just yet, the overhang of a typically bearish September (which bleeds into early October) is still out there.
And, perhaps worse than a short-term stumble, though the economy still seems to be in growth mode, this economic expansion phase is now roughly eight years old and getting long in the tooth. We all know that sooner or later, the market’s going to suffer some sort of setback.
That doesn’t mean investors have to throw in the towel and move to an all-cash position, however. When the time finally comes, a bear market simply means you’ll want to change your strategy a bit.
Although it hopefully won’t matter for a long, long while, it’s never too soon to start tentatively planning your purchases should things clearly take a turn for the worst. Here’s a closer look at nine mutual funds and ETFs you might want to make a point of owning in the midst of a bear market.
Mutual Funds and ETFs: AMG’s Yacktman Fund (YACKX)
It just makes sense that even in a harrowing environment, people are going seek out safer, more reliable names… names with an encouraging future that hold their value because those business generate lots of cash and are more or less non-cyclical. The easiest way to tap into that approach is by owning the Yacktman Fund (MUTF:YACKX), from the AMG family of funds.
Interestingly, it’s not a value fund pe se. Its managers are more than willing to buy growth companies, if shares of that company are at historically low valuations and the underlying business is one that boasts short customer-repurchase cycles and offers a strong return on tangible assets.
One of the self-imposed requirements for the Yacktman Fund’s picks is shareholder-oriented management that can afford to reinvest in its business and still have money left over.
It’s a breath of fresh air for a mutual fund industry that tends to swing for the fences at almost any cost.
Mutual Funds and ETFs: Vanguard Dividend Appreciation Index (VDAIX)/Vanguard Dividend Appreciation ETF (VIG)
A handful of fund companies, like Vanguard, maintain ETFs as well as traditional mutual funds that reflect the same underlying index, just to give investors flexibility in how they trade.
And, one such fund is a great way to play a bear market is the Vanguard Dividend Appreciation Index Fund Investor Shares (MUTF:VDAIX), or its ETF counterpart, the Vanguard Dividend Appreciation ETF (NYSEARCA:VIG).
Dividends are never exactly unpopular, but they do become more important than usual when there’s little to no growth on the horizon and the only way to keep a portfolio moving forward is through income.
That’s what the Vanguard Dividend Appreciation Funds do, and then some.
Not only do both seek out the market’s top-dividend payers, the fund seeks out companies with a strong track record of raising their dividends even when times are tough.
Mutual Funds and ETFs: Janus Henderson Global Life Sciences Fund (JFNAX)
It seems a little counterintuitive to be thinking about aggressive (and sometime hyper-aggressive) biotech and biopharma stocks when the broad market is losing ground. After all, these names seem like they’d be especially vulnerable to a bearish undertow.
There’s a method to the madness, however. Though biotech stocks can and do ebb and flow in a big way, they move in their own cycles rather than the economic cycle. Things like legislative action, scientific breakthroughs and sweeping patent expirations can set the stage for sustained waves of growth.
You could certainly pick individual stocks to tap into the upward stroke of that cycle, but an easier way to garner exposure may be to purchase a stake in the Janus Henderson Global Life Sciences Fund (MUTF:JFNAX), which handpicks companies that are addressing specific unmet medical needs.
Mutual Funds and ETFs: Direxion Monthly S&P 500 Bear 2X Fund (DXSSX)/Direxion Daily S&P 500 Bear 1X Shares (SPDN)
Here are another set traditional mutual fund/ETF twins… almost. Neither are exactly for the faint of heart though. Indeed, neither will be appropriate for the majority investors.
The Direxion Monthly S&P 500 Bear 2X Fund (MUTF:DXSSX) and its sister, the Direxion Daily S&P 500 Bear 1X Shares (NYSEARCA:SPDN), are built for traders who want to speculate on when the market’s top and when the market’s bottom will materialize. If you’re wrong, it could hurt. How so? Because the ETF — SPDN — rises as much as the S&P 500 falls, but also loses value as the same pace the S&P 500 gains.
The fund — DXSXX — also moves inversely with the market, but even more so. That is, for every 1% loss the S&P 500 suffers, the fund gains 2% in value. A 20% setback for stocks could translate into a 40% gain for the Direxion Monthly S&P 500 Bear 2X Fund. On the flipside, if you’re wrong about where the market’s top is and it gains another 20%, your DXSXX trade will be in the hole to the tune of 40%.
That’s why these two possible picks aren’t well suited for investors without a strong sell discipline.
Mutual Funds and ETFs: Utilities SPDR ETF (XLU)
Although utility providers don’t actually see any more profitability nor pay out any greater dividends when stocks are in a bear market, the safety and reliability of utility stocks become immensely more attractive when little else is.
That makes the sector prone to bullishness in tough times; investors are looking for a limited number of safe havens.
Surprisingly, not all utility names perform similarly in a bearish environment, making the selection of just one or two of them a potentially frustrating matter. The simpler, lower-risk solution is simply jumping into a broad-based utility ETF like the Utilities SPDR ETF (NYSEARCA:XLU).
Mutual Funds and ETFs: Vanguard Intermediate-Term Government Bond ETF (VGIT)/Vanguard Intermediate-Term Government Bond Index Fund Admiral Shares (VSIGX)
Generally speaking, when stocks are doing poorly, something else is doing well. Money has no home — it just seeks out the most compelling risk/reward scenario at any given time.
Bonds are one of the asset categories that tend to thrive from the demise of stocks, putting the Vanguard Intermediate-Term Government Bond ETF (NASDAQ:VGIT) or the Vanguard Intermediate-Term Government Bond Index Fund Admiral Shares (MUTF:VSIGX) in the spotlight. Both own U.S. government debt, or bonds that are backed by the federal government.
You’ll likely never see a heroic-sized gain from this fund or ETF, but you should see better-than-average results when most everything else is failing.
Mutual Funds and ETFs: ProShares UltraShort Technology ETF (REW)
Here’s another great trading idea for a bear market, but again, only for a select set of investors that can and will keep close tabs on the market, and for traders willing to take a loss should things unexpectedly take a turn for the worst… the ProShares UltraShort Technology ETF (NYSEARCA:REW)
As the name implies, REW gains in value when the Dow Jones U.S. Technology Index loses value. What the name doesn’t indicate, however, is that ProShares UltraShort Technology ETF gains twice as fast as tech stocks lose; for every 1% decline we see from the Dow Jones U.S. Technology Index, REW gains 2%.
The opposite is true, of course, which is what makes this ETF so scary. If the technology sector unexpectedly rallies, the ProShares UltraShort Technology ETF will lose ground twice as fast. Inasmuch as technology stocks are usually the most vulnerable names in a bear market though, REW is at least worth mentioning.
Mutual Funds and ETFs: Vanguard Emerging Markets Stock Index Fund (VEIEX)/Vanguard Emerging Markets Stock Index ETF (VWO)
As was the case with the biotech fund, the idea here is to garner exposure to areas that are completely removed from the mainstream economic cycle. That downturn may be limited to the U.S., and even if it’s something more global, some emerging markets are growing so quickly they can shrug off worldwide economic malaise.
Indeed, the currency turmoil that could be created by a bear market induced by a recession could give some emerging markets an added boost.
Mutual Funds and ETFs: AdvisorShares Ranger Equity Bear ETF (HDGE)
Last but not least, rather than gimmicks are venturing into unfamiliar territory as a means of playing defense, it may be wise to simply adopt the more straightforward strategy of shorting United States stocks that are the most vulnerable to a bearish undertow… and you don’t even have to pick them yourself. The managers of the AdvisorShares Ranger Equity Bear ETF (NYSEARCA:HDGE) can do all the work for you.
Just as the name suggests, the AdvisorShares Ranger Equity Bear ETF is a fund dedicated to shorting stocks that look ripe for a loss. What’s so unique about the fund is how disciplined its approach is. As the fund’s website explains:
“In selecting short positions, the Fund seeks to identify securities with low earnings quality or aggressive accounting which may be intended on the part of company management to mask operational deterioration and bolster the reported earnings per share over a short time period. In addition, the Portfolio Manager seeks to identify earnings driven events that may act as a catalyst to the price decline of a security, such as downwards earnings revisions or reduced forward guidance.”
What the fund’s managers have that you don’t is the time and tools to find the best of these bearish trades.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter.