This week, following renewed oil price weakness, markets reached bear market status worldwide, with the MSCI All Country World Index breaching the 20 percent decline threshold from a high set last May.
If you wonder what that means, this is actually the part of the cycle whenever your adviser hides under their desk, and also you, upon reading your account statements, assume what is known in airline lingo as the crash position.
The alternative, of course, which many people choose, would be to not read statements at all – it probably isn’t as irresponsible because it seems, given that there is not much you can do, irrespective of what you may want to think.
Or is there?
Overall, I believe Canadian investors are facing the mother of perfect storms. On the one hand, we have fees for asset management that are one of the highest in the world, which combined with a large closet-indexing fraternity in mutual funds and investors traditionally responsible for a high “home-bias” (the tendency to take a position one’s portfolio mostly in domestic securities) are detrimental to investment success.
Lessons from the biggest ETF display on EarthHow funds can combat stock market volatility
On another, we have record amounts of indebtedness, high property valuations (even though they are correcting in oil-shocked Alberta), along with a poor report card on the savings rate front.
Unless some of these challenges are resolved, including significant reforms to market structure, the risk is that a great many people will discover ourselves significantly less rich than we thought – compounding the pain sensation of the unfolding bear market.
In the interim, ETFs can help.
While the performance of ETFs will be negatively affected by the indiscriminate bear, there are also ways they can provide pockets of relative outperformance even in times during the distress.
Below you’ll look for a listing of ETFs that fare well when markets behave badly. No real surprise, these are mostly of the “Bear” persuasion – meaning they are designed to make money when their underlying exposure loses ground.
Here are a few suggests remember when considering “Inverse” and “Bear+” ETFs:
? They are ETFs designed to produce positive returns his or her underlying exposure loses ground. If you feel oil prices heading down – a Bear+ ETF on Oil (HOD) offers the ability to take part in that “trade.”
? Inverse are 1X leveraged; “Bear+” 2X leveraged. 2X leveraged are reset on a daily basis, which has significant implication for holding periods beyond a day. Commodity ETFs entail additional considerations, for example contango/backwardation, which can significantly impact returns outcomes.
?Inverse volatility (HVI) loses ground when volatile conditions return
?Bear+ on Gold and Silver lose ground because the metals rebound using their own significant bear markets. This is due to their traditional safe-haven appeal, sitting on providing diversification from market declines in equities.
? These ETFs are generally best used for short term trading, as well as their use aligns best with investors with and the higher chances tolerance and more of the trading orientation
Yves Rebetez is managing director of ETFinsight.