4 ETFs to Buy to Protect Against Huge Market Losses

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It has now been six years since the depths of the Great Recession and the ensuing stock market sell-off. The S&P 500 is up over 200% in that period, and we have not had a 10% correction in the markets in over three years, although we came close in 2012. The bottom line is that it will come, and the only thing is when, not if. It may surprise some to know that the current S&P 500 bull market rally is the third longest ever.

In a recent research note, not only does the equity strategy team at Merrill Lynch advocate some rotation, they also say a little retreat could be in the cards as well. By retreating, they mean by raising cash and, perhaps for some accounts, even buying some gold.

Here are the four trades that investors in the United States may want to be very cautious of going forward. With such a long drought since a 10% correction, the markets are overbought. Even Warren Buffett said on Monday that stocks were expensive, just not as expensive as bonds.

The U.S. Dollar

For those who actively have been involved in this trade, it has been a huge winner. Some 85% of all currency transactions across the world involve the U.S. dollar. It is the world’s primary reserve currency, and 25 different currencies are pegged to the U.S. dollar. The bottom line though is that this is perhaps the most crowded trade on Wall Street. And regardless of whether an account actually owns dollars or is short the euro, this is going to end up bad if serious selling starts. There are ways however to take the other side of this trade.

While futures or short-currency approach are possibilities, there is a lower-risk short U.S. dollar exchange traded fund (ETF) option that may make more sense for many investors. That is because short U.S. dollar ETF prevents investors from losing more than their initial investment, and it is also cheaper than directly shorting currencies or utilization of futures contracts. The PowerShares DB U.S. Dollar Bearish ETN (NYSEMKT: UDN) makes sense for investors looking to be short the dollar.

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