Investing
12 ETFs to Avoid a Stock Market Crash in 2019 -- and Maybe Even Profit From It!
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The current raging bull market may be more than 10 years old, but multiple scares along the way have unnerved many investors. As the fourth quarter of 2018 was a serious wake-up call that stock market sell-offs are possible, many investors have grown worried about when the stock market crash will come. Despite the markets still being up in 2019, with all-time index highs in July, there was a serious selling wave from “Sell in May and Go Away!” and then again in August based on slower global growth, falling interest rates reaching the dreaded inverted yield curve and the persistent retaliation in the U.S. and China trade war.
With all the ups and downs in the stock market and the U.S. Treasury yield curve inverting, the financial media has been using “recession” in every headline that they can work it in. After all, trade wars and poor earnings results from many of the top companies in the nation don’t add up all that well. And the thought of a recession brings back painful memories of the Great Recession and the stock market crash of 2008 and 2009.
While stock market panics and crashes are unnerving for almost every type of investor, there are many ways that even retail investors can protect themselves from big stock market sell-offs. No rule or law says you have to lose your assets during a sell-off or even during a crash. To go a step further, you might even be able to profit from the next major stock market sell-off, even if that is a market crash.
24/7 Wall St. has compiled a list of 12 exchange-traded funds (ETFs) and exchange-traded notes (ETNs) for investors who fear the next stock market crash. The reality is that most investors have to keep their money somewhere in the financial markets, and ETF and ETN products even generally can be used in most retirement accounts. These ETFs and ETNs cover multiple strategies outside of regular equity index investing, and we have included some instances of ETFs that have not performed properly, along with other risks and caveats that should be considered about each fund.
The next time you see a stock market crash, or just a major market pullback in a short period, go back and look at these ETFs and ETNs and see how they performed. Some will not have rallied much due to their structures, but some are likely to have seen major gains as that stock market panic kicked in. Investors also should consider that there are multiple other ETF issuers that may compete directly against these mentioned, and some may have the exact strategy. Leveraged and inverse ETFs have been left out of this review.
Here are 12 ETFs for investors who want to avoid, or even profit from, the next big stock market sell-off, or even a stock market crash.
1. Short-Term Treasury ETF
There’s supposed to be a tug-of-war of some sort between stocks and bonds during periods of volatility and uncertainty. When investors get spooked out of stocks, they often decide to park in short-term and intermediate-term bonds. Many funds track short-term Treasuries. 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, and watching the trading prices here might sometimes feel like watching paint dry, 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 even worse in instruments like this. There are multiple other short-term and money market instruments out there to choose from.
24/7 Wall St.2. Adjustable Treasury ETF
Another investment in Treasury debt is in the Treasury Inflation-Protected Securities (TIPS). The go-to ETF for this strategy is the SPDR Bloomberg Barclays TIPS ETF (NYSE: IPE), which 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 is supposed to adjust higher at the same time or with a short delay. Just keep in mind that if short-term interest rates start to go back down, the yield is supposed to come back down here too.
You aren’t going to get rich going for adjustable-yields with the government guarantee, but you also 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 way that they actually could result in negative yields temporarily.
3. Long-Dated Treasury Bonds
The iShares 20+ Year Treasury Bond ETF (NASDAQ: TLT) tracks the results of the ICE U.S. Treasury 20+ Year Bond Index, and the fund is set to generally invest at least 90% of its assets in the bonds within the underlying index and of those at least 95% of its assets are in U.S. government bonds with an average maturity that is greater than or equal to 20 years.
Unlike underlying debt or ETFs with short-term bills and shorter maturities of notes out to a couple of years, this actually has a high duration, and it comes with more market risk than its shorter-dated cousins like the Schwab Short-Term U.S. Treasury ETF and others. If there is an instance when stocks are tanking and it’s because interest rates are rising, or even if interest rates are rising coincidentally, this one comes with more exposure.
4. 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.
24/7 Wall St.5. The Preferred Stock ETF
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 are wiped out entirely.
Unfortunately, even this preferred stock 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. Gold as the Ultimate Uncertainty Hedge
You’ve undoubtedly seen many gold coin and gold gimmick commercials on TV over the years. Well, gold often is considered the ultimate safe-haven trade by many U.S. and international investors alike. The SPDR Gold Trust (NYSE: GLD) is the granddaddy of all gold ETFs and is 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 each 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. At the start of May of 2019, this ETF was trading at $120 per share, but it had rallied to over $144 by mid-August.
7. 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 ETF might not be immune to an outright stock market crash, but during most sell-offs investors who want to (or need to) keep exposure to stocks almost always flock toward large-cap and defensive companies with quality balance sheets and stable dividends.
8. 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 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 the ETF and/or their weightings can change, and the ETF and the index are rebalanced and reconstituted only twice per year (January and July).
24/7 Wall St.9. 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 actually are allowed, with certain exceptions.
10. 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 short-selling 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. There are also many inverse performance ETF and ETN products for investors who want to have exposure to drops in certain sectors and not the market as a whole.
11. Utilities Are Very Defensive as a Stock Sector
There are many instances when the stock market may be trading sharply lower but the basket of utilities stocks is rallying simultaneously. The reason is that investors know the public probably isn’t going to turn off their electricity and other utilities, and these stocks generally come with dividend yields that are higher than what can be made with Treasury notes and bonds.
The Utilities Select Sector SPDR Fund (XLU) invests at least 95% of its total assets in the top electric, water and multi-purpose utilities, as well as independent power and renewable electricity producers and utilities that supply gas to consumers. Its top holdings are generally the largest U.S. utilities by market capitalization, and on last look its yield was still above 3%. This fund was trading at $57.50 in early May of 2019, and it had reached $61.50 in mid-August as rates had come down and as the market volatility was up.
12. Investing in Volatility to Protect Against Volatility
Some investors want things kept simple, but investing in “volatility” sounds counterintuitive for investors who want protection from a market crash. The reality is that as the stock market rises, the volatility indexes go lower, and when the stock market selling pressure kicks in then the volatility indexes rise. There have been multiple “Volatility ETFs and ETNs” that trade, and many of them disappear because they effectively mature or expire. This prevents continual price decay each month when futures contracts expire.
The iPath S&P 500 VIX Short-Term Futures ETN (BATS: VXX) invests in CBOE Volatility Index futures contracts that are also under “the VIX,” in the financial media lingo. This ETN has rallied massively when the stock market tanks, but it also sees its price tank every time the market recovers. In a stable market that doesn’t have big swings up and down, its price generally tends to erode on those days and during longer periods. After all, if there isn’t much volatility and you have something buying futures contracts tracking volatility — enough said?
During the “sell in May” panic of 2019, the market tanked and this ETN rose from roughly $25.50 to over $31.00 in just a few days. At the July 2019 peak of the market at all-time highs, the index went from under $22 to as high as $30.50 in mid-August at the height of the inverted yield curve scare. The volatility ETF and ETN products also can come with tracking error risks, and the movements in this ETN tend to be more correlated to big stock market drops that occur during the trading day rather than big gaps down overnight.
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