Broadly speaking, May has been a tough month for stocks. At this writing, there is just one trading day left in the fifth month of the year and S&P 500 appears poised for a monthly gain, but some major international indexes are likely to finish the month lower.
For example, the MSCI EAFE Index and the MSCI Emerging Markets Index could finish May with losses in excess of 2%. While a global selloff has not officially arrived, concerning signs are abound. Recent turmoil in Italy is stoking speculation that the Eurozone’s third-largest economy could be on the brink of leaving the European Union.
Among emerging markets of concern, even with the benefits of a late-month rally, the Turkish economy will finish May with hefty losses even after the central bank there boosted interest rates in an effort to defend the sagging lira currency. Brazil, one of the largest geographic exposures in the MSCI Emerging Markets Index, entered a new bear market in May amid labor strife and concerns about the country’s presidential election, scheduled for later this year.
Still, there will be opportunities should a legitimate global selloff materialize. Here are some of the best funds to consider if that ominous scenario comes to pass.
Best Funds for a Global Selloff: Direxion Daily MSCI Emerging Markets Bear 3X Shares (EDZ)
Expense Ratio: 1.12%, or $112 on a $10,000 position annually.
First, some disclaimers about on the Direxion Daily MSCI Emerging Markets Bear 3X Shares (NYSEARCA:EDZ). As its name implies, EDZ is a triple-leveraged bearish play on emerging markets stocks. Specifically, EDZ is designed to deliver triple the daily inverse returns of the MSCI Emerging Markets Index.
If the aforementioned weakness in developing world equities continues, EDZ will be one of the best funds to own for aggressive traders.
Investors new to the world of ETFs should understand that “ownership” of leveraged ETFs really means renting these intstruments for just a trading session or two. The longer EDZ — or any leveraged ETF — is held, the odds increase that it will deviate from its stated objective, potentially disappointing investors in the process.
For those who do not consider themselves active, risk-tolerant traders, EDZ is not one of the best funds to own. But those who can easily monitor positions during an emerging markets meltdown and move swiftly in and out of trades could designate EDZ with best funds status.
Best Funds for a Global Selloff: PowerShares S&P SmallCap Health Care Portfolio (PSCH)
Expense Ratio: 0.29%
One idea when looking for the best funds in advance of or after a global selloff is to look at those that were strong before the calamity ensued. As of May 30, just over 50 ETFs were sporting double-digit monthly gains, one of which was the PowerShares S&P SmallCap Health Care Portfolio (NASDAQ:PSCH).
The caveat here is there can be no guarantee that PSCH will rise if investors are running for the exits in other corners of the equity markets. That said, this healthcare ETF is one of the best funds to consider for two reasons. First, healthcare stocks often show some resiliency to global tumult. Second, small-cap stocks are usually more focused on the domestic economy.
PSCH’s 74 holdings hail from the biotechnology, pharmaceuticals, medical technology and supplies, and facilities industries.
Best Funds for a Global Selloff: iShares Core Conservative Allocation ETF (AOK)
Expense Ratio: 0.25%
One of the most confounding issues facing many investors during selloffs is what the right asset allocation mix between stocks and bonds. Add to that, some investors are apt to tinker with their portfolios too much after stocks have declined, selling those stocks low in favor of bonds only to miss out on an equity rebound.
The iShares Core Conservative Allocation ETF (NYSEARCA:AOK) is one of the best funds to consider when stocks dip because it provides exposure to equities and fixed income assets using an efficient, cost-effective ETF-of-ETFs structure. Each of AOK’s seven holdings are other iShares. Indeed, AOK lives up to its conservative billing as about 70% of its portfolio is devoted to two iShares bond ETFs.
Adding to the case for AOK as one of the best funds for a global selloff is its lack of volatility. AOK’s three-year standard deviation of 3.95% is less than half of that of the S&P 500.
Todd Shriber does not own any of the aforementioned securities.
