Some of the investments mentioned in this article are not suitable for every investor. Investors who are interested in utilizing ETFs need to read the prospectus and understand the risks of using such instruments. Further financial consultation may be required.
Below you will find three different ETFs that you can use in a down market, otherwise known as a bear market. Each of these investments play different sectors of the stock market, one plays the US dollar, another plays the opposite move of the S&P 500, while the last one tracks the price movement of the 30-year treasury bond.
UUP – US Dollar Bull
There's a very simple correlation between the US stock market and the US dollar: when one falls, the other rises. Part of the reason for this correlation is that if the USD falls, foreign markets buy US products, US companies earn more and their stock price goes up. However, if the USD rises, companies aren't able to sell as much to foreign markets which means profits get squeezed and the stock price falls. So, for a very simple correlated market, buying into the UUP ETF will give you exposure to the USD as the stock market falls.
SDS – S&P 500 Inverse
The S&P 500 stands as one of the best gauges of US equities. The stock market, however, is prone to bull and bear cycles like anything else. As a result, just as the stock market index will rise in price, so too it will fall. That being the case, you can protect yourself from a falling stock market by investing in an inverse ETF. Inverse ETFs aim to reproduce the opposite daily price change of the underlying asset. The SDS inverse ETF tracks the S&P 500 and aims to reproduce the opposite daily price change of the index. So, if the S&P 500 closes down by 1%, the ETF will rise by 3%. The one caveat of these types of ETFs is that they are re-calculated every day at 4:30 pm in New York. What that means is that they only track the daily price movements and may not accurately reflect the price of the index over a longer period of time.
TLT – 30-Year US Treasury Bond
Although cash may be the safest asset to hold in your portfolio when the market turns down, another investment can be government or corporate bonds. The TLT tracks the daily price change of the 30-year US Treasury Bond price. Why would you want to invest in a bond ETF if the market is falling? Bonds, like currencies, often run in the opposite direction of the general market. Thus, if the stock market is going up, no one needs to buy bonds because equities would offer a better return. However, when the stock market, or more specifically, equities, go down, then investors may choose to invest in less riskier assets such as bonds. Bonds offer a long-term investment choice geared towards a steady return over a period of years. The 30-year Treasury Bond is just that, a piece of paper saying that the government will pay you X amount of interest over a 30-year period and deliver that payment at the end of 30 years. Government bonds are often backed by a federal agency which means, unlike a company, they won't go bankrupt and disappear over night... in theory! However, there is a price to be paid for that bond, especially when governments begin printing money as they have recently done. All that being said and done, governments bonds remain a “safe” investment for rick-averse investors.
Good luck and profitable investing!
Perform your own due diligence and consult your financial advisor before making any investment decisions.