For some investors, the market may already be sour. Over the past 12 months, the S&P 500 has returned just 2.9%, including dividends paid. Over the past 90 days, the situation is even more glum as the benchmark U.S. equity gauge is lower by 0.40%.
In either case, those aren’t figures to be excited or alarmed about, but as the old saying goes, failure to prepare is preparing to fail. What that means is that there are some signs that stocks could be due for a retrenchment. Notably, global economic growth is slowing and the spate of economic data reports out during the week Sept. 1 through Oct. 4 were tepid at best while some were downright concerning.
Investors don’t need to run to cash, Treasuries or other safe-havens because the fund universe, particularly the exchange traded funds (ETFs) landscape, is chock full of options for investors looking to not just survive, but thrive when markets turn south.
With that in mind, here are some funds to buy if the market gets ugly.
ProShares Decline of the Retail Store ETF (EMTY)
Expense Ratio: 0.65%, or $65 annually per $10,000 invested
The ProShares Decline of the Retail Store ETF (NYSEARCA:EMTY) is a fund to buy if the broader market retreats because if that scenario comes to pass, weakness in consumer data will likely be a contributing factor. After all, one of the primary factors keeping many economists from calling for a recession over the near-term is the strength of the U.S. consumer.
Another reason that EMTY is a fund to consider buying is that this ETF can work even as markets rise … even though it’s an inverse product. The reason for that is EMTY addresses a specific investment thesis: the rapid decline of traditional brick-and-mortar retailers. Forever 21’s recent bankruptcy is just the latest reminder that standard retailers are having a rough time competing with online rivals and that physical stores are closing by the thousands in the U.S.
On that note, mall vacancies are surging in many important markets around the country. These factors don’t mean the consumer is in bad shape. Rather, signs are mounting that shoppers like online venue, a fact likely to be confirmed again during the upcoming holiday season.
In other words, EMTY is a fund to buy whether or not the market declines over the near-term. But if it does, that scenario likely benefits this bearish ETF.
Cambria Tail Risk ETF (TAIL)
Expense Ratio: 0.59%
Recent markets validate the Cambria Tail Risk ETF (CBOE:TAIL) as a fund to buy when stocks pull back. TAIL is an actively managed fund that mixes Treasuries as a volatility hedge and purchases of out-of-the-money put options to lever the fund to broader market pullbacks.
“TAIL strategy offers the potential advantage of buying more puts when volatility is low and fewer puts when volatility is high,” according to Cambria. “While a portion of the fund’s assets will be invested in the basket of long put option premiums, the majority of fund assets will be invested in intermediate term US Treasuries.”
A simple way of looking at TAIL is that it is a fund to buy when markets swoon, but investors should expect the fund could deliver negative returns during strong-trending bull markets. That’s simple, but true.
AdvisorShares Dorsey Wright Short ETF (DWSH)
Expense Ratio: 0.90%
The AdvisorShares Dorsey Wright Short ETF (NASDAQ:DWSH) is not a fund to buy when stocks are moving higher. On the hand, DWSH is an ideal fund to buy when the markets are tanking because all of its positions are bearish. DWSH rooted in relative strength, a technical indicator that is equally as useful on the bearish side of things as it is on the bullish side.
“Relative strength investing involves buying securities that have appreciated in price more than the other securities in their investment universe and holding those securities until they exhibit sell signals,” according to AdvisorShares.
DWSH usually has 75 to 100 short positions and the fund is currently overweight some sectors that would be vulnerable to broader market retrenchment, such as consumer discretionary and energy. Additionally, DWSH devotes 76% of its weight to short positions on mid- and small-cap stocks, two groups that would likely decline more rapidly in the event of full-fledged market turmoil.
AGFiQ Dynamic Hedged U.S. Equity ETF (USHG)
Expense Ratio: 0.55%
As its name implies, the AGFiQ Dynamic Hedged U.S. Equity ETF (NYSEARCA:USHG) has a hedging mechanism to it, making it an ideal and potentially effective play when stocks retreat.
This fund to buy uses “proprietary sector allocation and risk models are evaluated on a daily basis so the portfolio can be responsive to changing market conditions,” according to the issuer.
What’s interesting about USHG is that it does feature a long position in S&P 500 stocks, so it’s not an outright inverse ETF. So if a false bearish flag waves, investors using this fund to buy won’t be punished as severely as they would be if they were holding a true bear product.
“The ETF offers exposure to the long-term growth potential of U.S. equities using a multi-factor approach designed in an effort to have lower volatility and better risk-adjusted returns relative to the market through its use of a dynamic hedging model,” according to ETFDB.
IQ Hedge Multi-Strategy Tracker ETF (QAI)
Expense Ratio: 0.80%
The IQ Hedge Multi-Strategy Tracker ETF (NYSEARCA:QAI), which tracks the IQ Hedge Multi-Strategy Index, is over a decade old, making it one of the more seasoned funds to buy in this category. What’s nifty about QAI is that it has brought investment strategies previously accessible via hedge funds to a broader swath of investors.
Under one umbrella, QAI features exposure to long/short equity, global macro, market neutral, event-driven, fixed income arbitrage and emerging markets. The fund accomplishes this in efficient fashion by holding other ETFs.
Like some of the other funds to buy mentioned here, QAI is not true bearish fund. However, the fund’s current roster is dominated by ultra-safe, short-term Treasury ETFs, so QAI should remain relatively sturdy if a bear market comes to pass.
Fun fact: QAI is definitely a fund to buy for investors looking to eschew volatility because the fund has been less volatile than some well-known low-vol funds over the past three years.
ProShares Short QQQ (PSQ)
Expense Ratio: 0.95%
It’s not a stretch to say that if markets swoon, some of that pullback is coming out of the technology sector’s hide. The sector is the largest in the S&P 500, but its weight in the Nasda q-100 Index is almost double, making ProShares Short QQQ (NYSEARCA:PSQ) an ideal fund to buy in turbulent markets.
PSQ is designed to deliver the daily inverse returns of the Nasdaq-100, so if that index falls by 1% on particular day, this fund to buy should be up 1%. Since it’s not a leveraged ETF, PSQ can be held a bit longer and traders don’t need to worry about catastrophic short-term losses.
PSQ is also a fund to buy for investors looking to hedge long positions in big-name tech stocks, such as Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT), which command significant percentages of the Nasdaq-100. Only a handful of bearish ETFs are bigger by asset than PSQ.
VanEck Vectors High-Yield Municipal Index ETF (HYD)
Expense Ratio: 0.35%
Municipal bonds are among the most conservative asset classes, meaning the VanEck Vectors High-Yield Municipal Index ETF (NYSEARCA:HYD) is a great fund to buy in rocky market environments, but investors don’t need to wait for that scenario, particularly if they’re searching for income.
With the benefit of municipal bonds sharing barely any correlation to equities, HYD has 30-day SEC yield of 3.37%. That’s well above the dividend yield on the S&P 500 and the yields on 10-year Treasuries and investment-grade muni benchmarks. Additionally, income from municipal usually isn’t taxed at the federal level, so investors get income perks and a tax benefit with this fund to buy.
If there’s a risk with HYD in a bad market environment, it’s the following admittedly far-flung scenario. In a deep recession, some cash-strapped states could be further pinched, lose more population and see their credit ratings punished.
There are no guarantees of a spate of municipal defaults in the next recession, many of HYD’s holdings are issued by cities in states or states themselves that are high tax areas shedding population. For example, muni debt issued by California, Illinois and New York combine for over a third of HYD’s roster.
As of this writing, Todd Shriber did not hold a position in any of the aforementioned securities.