Investing

10 ETFs to Avoid the Next Stock Market Crash -- or Profit From It

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An atrocious October in 2018 has spooked many investors in the stock market. And almost as fast, the stock market has proven yet again that it can bounce back rapidly. Just don’t look away from your money and investments for very long. The financial media keeps reminding the public that the next big sell-off, or even a crash, could be right around the corner if certain risks become reality. Here’s the other reality: You don’t have to lose your assets during a stock market sell-off or even during a crash, and you can even profit from it!

24/7 Wall St. has gathered a list of 10 exchange-traded funds (ETFs) and exchange-traded notes (ETNs) for investors who have to put their money somewhere but are afraid that the stock market could tank at any moment. These cover multiple strategies outside of regular equity index investing, and we have included instances where the ETFs have not performed properly and we have identified some risks and caveats that investors need to consider about each fund.

The next time you see a stock market crash, or just a major market pullback in a short period, be sure to look back at the performance of these specific ETF products. You’ll probably be surprised just much better they do as a whole compared to any index tracking the Dow Jones industrial average, the S&P 500 and the Nasdaq 100. And investors should consider that there are probably a few options from other ETF issuers that compete against these, almost down to the exact same strategy. Leveraged ETFs and ETFs that are too difficult to easily explain have been left out of this review.

Here are 10 ETFs for investors to seek out of they are worried about the next stock market sell-off or crash being right around the corner.

1. Short-Term Treasuries

There’s always supposed to be a yin and yang of some sort between stocks and bonds. When investors get spooked out of stocks, they often decide to park in short-term and intermediate-term bonds and the funds that track them. The Schwab Short-Term U.S. Treasury ETF (NYSE: SCHO) is probably about as safe as you get because it only invests in short-duration government debt. You’re never going to get rich investing in short-term and money-market funds, but you won’t have to worry about looking away from the ticker tape a couple of days and seeing your investment down 10%, 15% or worse. There are multiple short-term and money market instruments out there to choose from.

2. Adjustable Treasuries

Another investment in Treasury debt is in the Treasury Inflation-Protected Securities (TIPS). SPDR Bloomberg Barclays TIPS ETF (NYSE: IPE) invests in Treasury debt that has an adjustable yield rather than investing in fixed coupon debt. As Treasury yields and inflation rise, the yield on the TIPS adjusts higher with them. If interest rates go down, the yield goes down here too. You aren’t going to get rich going for adjustable-yields with the government guarantee, but you won’t ever go broke. One consideration is that some TIPS were constructed at one point in the no-rate and low-rate cycle in a manner that they could actually get negative yields temporarily.

3. Short-Intermediate Corporate Debt

If you want a little extra yield than short-term government debt, there is corporate debt issued by the top companies in America. They almost always have a higher yield than their government counterparts, and almost all the companies are investment grade in the Vanguard Short-Term Corporate Bond ETF (NYSE: VCSH). This ETF goes out a little further on the curve for added yields as it tracks the Bloomberg Barclays U.S. 1-5 Year Corporate Bond Index. The ETF includes dollar-denominated, investment-grade, fixed and taxable debt issued by industrial, utility and financial companies. Just keep in mind that this ETF was created after the Great Recession.

4. Gold

You’ve undoubtedly seen many gold coin and gold gimmick commercials on TV over the years. Well, gold is often considered the ultimate safe-haven trade by U.S. and international investors alike. The SPDR Gold Trust (NYSE: GLD) is the granddaddy of all gold ETFs as the largest physically backed gold ETF. Gold has not been as dominant during the great bull market in stocks and as interest rates have risen, but when investors want the ultimate safety they frequently go for gold. During the Great Recession, the gold ETF and gold itself did slide lower in 2008, but it bottomed late in 2008 about four months ahead of the V-bottom in stocks, and it was off to the races long before stocks with a much stronger gain than equity ETFs through all of 2009 and 2010.

5. Preferreds for Safety

The iShares Preferred Stock ETF (NYSE: PFF) invests in preferred shares rather than common shares. This is a tad more complicated for those new to investing, but they generally come with better safety and higher yields than buying regular stock. During the market crash of 2008 and 2009, many investors wanted to look at preferred securities of major banks and major companies. If things got too bad in the economy, preferred shares, similar to bondholders, are actually senior to the common stockholders. That means if a company folds, the preferred shareholders may still get money back even if the common stockholders get wiped out entirely. Unfortunately, even this ETF performed poorly during the Great Recession due to a high reliance on financial and other companies that were hurt badly during the stock market sell-off.

6. Defensive Stocks

Invesco Defensive Equity ETF (NYSE: DEF) aims to track the Guggenheim Defensive Equity Index, which is designed to provide exposure to equity securities of large-cap U.S. corporation. The index selects companies that are deemed to have superior risk-return profiles during periods of stock market weakness and that still offer potential upside during periods of market strength. This might not be immune to an outright stock market crash, but investors flock toward large-cap and defensive companies during most sell-offs.

7. High Yield – Low Volatility

Almost all investors like high dividends, but in periods of uncertainty they also like to have positions that are not as volatile as the broader market. That is where the SPHD Invesco S&P 500 High Dividend Low Volatility ETF (NYSE: SPHD) comes into play. This ETF tracks the S&P 500 Low Volatility High Dividend Index and is made up of 50 of the S&P 500 stocks that are deemed to have high dividend yields and low volatility. One risk here is that sometimes companies inside change, and the ETF and the index are rebalanced and reconstituted only twice per year (January and July).

8. Short Selling the Stock Market

If you want to own a less sophisticated short selling ETF, the ProShares Short S&P 500 (NYSE: SH) is designed to have the inverse daily performance of the S&P 500 Index so you don’t have to worry about stock picking versus the broader index. If you want to be short the stock market while still owning an ETF, this is perhaps one of the easiest ways. And unlike direct short selling of securities being banned in your IRA or qualified retirement plan, most short-selling equity index ETFs are actually allowed, with certain exceptions.

9. Select Short Selling Like a Hedge Fund

Yes, you pretend to be a sophisticated short seller just like a hedge fund to profit from a falling stock market without ever making another decision. The AdvisorShares Ranger Equity Bear ETF (NYSE: HDGE) uses a bottom-up (or company-specific) research model that incorporates fundamentals in its selection process. The ETF identifies companies that the fund advisor sees as having low earnings quality or aggressive accounting that may make results look better to the market than they do to the advisor. The fund also targets companies with expected earnings weakness and weak outlooks, something that happens broadly during market corrections and during economic soft spots. Be advised that this ETF is very painful to own when stock prices are soaring higher. While the broad market exploded higher from 2013 to 2018, this ETF slid lower and lower.

10. Volatility for Volatility’s Sake

For investors who don’t mind a little more tricky and harder to explain ETFs (or ETNs) in this case, there is the iPath S&P 500 VIX ST Futures ETN (NYSE: VXX). This ETN invests in CBOE Volatility Index futures contracts, which is also what the media refers to as “the VIX,” whenever the stock market gets volatile. It may sound odd that you buy something with volatility to avoid a crash or a market panic, but the reality is that the Volatility Index rises handily during rapid market sell-offs and crashes. In the October 2018 sell-off, many indexes pulled back 10% into the formal correction, but this ETN rose from about $26.50 at the start of October to as high as $41.00 right before the end of the month. That was a 10% market loss for equity indexes but a 50% gain for the “VIX ETF.” Just keep in mind this gets into serious decay in bull markets, and this ETN is effectively designed to only do well during periods of major selling and uncertainty. There is also the so-called tracking error risk that comes into play.

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