A tech bear market may well come again in 2023. The technology sector (most of the Nasdaq-listed companies) has experienced a large increase over the past couple of months, most notably in January 2023. After a bruising 2022, this has come as welcome relief to many investors. Given the uncertain macroeconomic environment and the unchanged rate-hike policy of the Federal Reserve, investors should still have some caution with this volatile part of the market.
Many market strategists are still nervous and cautiously anticipating the market performance for this year. Such an example is Morgan Stanley’s Wealth Management Strategist Lisa Shalett, who says:
“During crisis-fueled bear markets—such as the 2001 dotcom bust, the 2008 housing-related financial crisis and the 2020 pandemic-driven crash—a rapid easing of monetary policy was the antidote. This time, however, policy tightening will likely be the cause of economic slowing, as central bankers are forced to combat inflation; historically, this kind of bear market tends to be more prolonged.”
The tech bear market may or may not come, but there are options for those who want to hold on to tech stocks anyway, while still wanting to hedge any possible tech bear market.
Below you will find five ETFs that you can use to hedge your tech exposure in case the bear market comes roaring back in 2023.
These can give you either broad or niche exposure to benefit from the downside of tech and tech-adjacent movements.
ProShares Short QQQ ETF (PSQ)
First, a broad way to protect your portfolio of tech companies and ride out a wave of volatility without realizing any losses on your current positions is to simply buy the ProShares Short QQQ ETF (NYSEARCA:PSQ).
PSQ is an ETF that shorts the Nasdaq. While this will not protect against all the losses your positions may take, chances are that there is some correlation between how your technology stocks do and how the Nasdaq does as well. This is a relatively easy way to buy some protection and mitigate losses that your portfolio may incur. In 2022, it went up roughly 35%!
Direxion Daily Technology Bear 3X Shares ETF (TECS)
In a tech bear market, some of the first companies to go down will be in information services and software services, as well as the payments companies that rely on these services.
These are in many cases unprofitable software-as-a-service companies that rely on investors forecasting future cashflows in order to find a potential return on their investment. In a rising rate environment like we are in, raising money becomes much more expensive and potentially dilutive. Because of this, as we saw in 2022, cloud stocks, fintech, and information technology stocks took a particularly large hit.
The Direxion Daily Technology Bear 3X Shares ETF (NYSEARCA:TECS) returns triple the inverse performance of a collection of IT and cloud companies. If you believe that the technology sector will decline to an excessive level, then this is a more concentrated way to benefit from the crash. These stocks have a higher beta than most on the market and thus can go down faster than most, which in turn creates faster gains.
In 2022, this ETF returned about 45% for the year against a steep tech decline. It is important to remember, however, that the reverse is true as well. A sudden spike upward in these cloud stocks will send this going in the opposite direction, creating a very quick capital loss.
But if you hold a collection of cloud stocks, then this could be an aggressive hedge while you wait for them to rebound.
Direxion Daily Semiconductor Bear 3X ETF (SOXS)
In a tech bear market, the semiconductor industry often gets hit hard. As semiconductors and cloud computing become more intertwined, lower demand for cloud companies and cloud computing could translate into a soft demand for semiconductors. In some ways, this is already happening. As Tobias Mann of The Register points out:
“Intel, AMD, and Qualcomm, whose top-end chips depend on DRAM and NAND flash and are thus inexorably intertwined, saw declines across key markets including PCs, smartphones, servers, and game consoles. If customers aren’t buying memory, it makes sense they wouldn’t be buying PCs and servers to put it in.”
Disappointing recent earnings are a signal that the decline may continue to accelerate. In a recession, the electronics that semiconductors are components of are going to take less of consumer wallet-share. Cars, TVs, smartphones, and other gadgets are expensive and will be the first to go as Americans have less money overall.
At the same time, supply chains have begun to loosen and semiconductor companies may face an excess of inventory that they cannot get rid of. This could potentially drive down their prices as demand falls. As demand falls, the companies that make the semiconductors will perform worse, and their stocks will likely fall. In order to get ahead of this and hedge exposure to semiconductors, investors can place some money in the Direxion Daily Semiconductor Bear 3X ETF (NYSEARCA:SOXS). This ETF will triple the inverse of the return of a semiconductor index.
This is an investment that should be taken with caution because its highly levered nature makes it especially vulnerable to a beta-driven run-up of semiconductor stocks. However, a small stake coupled with a broad semiconductor play could be a great balance to help smooth out returns over the long term.
AXS Short Innovation Daily ETF (SARK)
Probably the most famous tech-focused ETF of the past two years has been the ARK Innovation ETF (NYSEARCA:ARKK) run by Cathie Wood. This ETF has had a turbulent ride.
After driving higher through the pandemic-fueled market frenzy, 2022 brought hardship to the ETF. In many ways this fund became an extreme version of the Nasdaq. When the Nasdaq would go down in 2022, it was usually the case that the ARKK ETF would be down a decent amount more. This is because it holds some of the most speculative investments in the tech ecosystem. Tesla (NASDAQ:TSLA) is a large holding for example, and that has been a highly volatile stock over the last year.
Many of the companies in the ARKK ETF are unprofitable and are thus especially susceptible to a rising-rate environment. In addition, more than a few of these are still considered overvalued by traditional financial metrics.
The AXS Short Innovation Daily ETF (NASDAQ:SARK) is a great way to get an unlevered layer of protection against a tech bear market because chances are that the ARKK ETF will trade the extreme of the Nasdaq. This ETF gives you the inverse of the ARKK performance. Further, if an investor likes some of the companies in the ARKK ETF but not others, they could go long on the companies they like in it and then buy SARK so they could make money on the spread in performance.
AXS Short De-SPAC Daily ETF (SOGU)
In a tech sector decline, risk assets as a whole will go down in value. There are few assets more speculative and risky than those in the SPAC market. This is because in their filings, companies going public through SPACs are allowed to put whatever projections they want in their documents. This is not the case with regular IPOs.
As can be somewhat expected, many SPACs fail to meet their projections. When this happens the stocks usually decline. The AXS Short De-SPAC Daily ETF (NASDAQ:SOGU) takes the inverse performance of a large collection of SPACs to allow for investors to profit when their shares go down. A tech bear market coupled with a potential recession would bring a dual combination of a flight from risk assets like SPACs and the missed projections from their filings. This could be a hard hit for the SPAC index in general and thus a potential windfall for this inverse SPAC ETF.
On the date of publication, Alexander Wah did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.