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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