10 ETFs to Help Avoid a Stock Market Crash and Maybe Even Profit From It!

December 6, 2018 by Jon C. Ogg

December historically has been a good month for the stock market, but in 2018 that Santa Clause rally remains elusive. Blame the trade war, tariffs, an arrest of a key Chinese executive, inverted yield curve fears, geopolitics, peak earnings and so on. And many investors are worried about 2019 not being as good as the political gridlock of past years. The bull market just feels old after 10 years, and many market pundits and reports are continually referring to the current climate as a late-cycle market and economy.

While the stock market has proven over and over that it can bounce back rapidly, often merely because it is oversold, the reality is that investors in 2018 have found it less rewarding chasing every market sell-off than in prior years. The Dow Jones industrials and the S&P 500 even went back into negative territory for the entire year. It has become imperative that investors who are staying in the stock market not look away from their money and investments for very long. And the financial media keeps spooking the public by warning that the next market crash may be forming if current risks turn into reality.

There is another reality outside of fear. You don’t have to lose your assets during a stock market sell-off or even during a crash. Not only that, you can even profit from a stock market crash if you are already positioned.

24/7 Wall St. has gathered a list of 10 exchange-traded funds (ETFs) and exchange-traded notes (ETNs) for investors who want to keep their money invested during periods of uncertainty. These ETFs are simply go-to investment and trading vehicles if it looks like the stock market could tank at any moment. These cover multiple strategies outside of regular equity index investing, and we have included instances in which the ETFs have not performed properly at times. We also have identified some risks and caveats that investors need to consider about each fund.

The next time you see the stock market sell off big, similar to now, 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. Investors also 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 those 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 a next stock market sell-off or crash right around the corner. And remember, some of these ETFs are built to fly higher during rocky stock markets.

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 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 Treasury ETF

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. 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 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.

5. 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 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.

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. There are also many inverse performance ETF and ETN products for investors who want to have exposure to drops in certain sectors rather than the market as a whole.

10. Volatility to Protect You From Volatility

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.” This ETN generally rises, sometimes massively, whenever the stock market gets volatile or sells off strongly. It may sound very odd that an investor would buy something with the theme of “volatility” to avoid a crash or a market panic, but that is the case here. 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 do well only during periods of major selling and uncertainty. There is also the so-called tracking error risk that comes into play.