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 the high set last May.
If you wonder what that means, this is actually the part of the cycle when your adviser hides under their desk, and you, upon reading your bank account statements, assume what’s known in airline lingo as the crash position.
The alternative, of course, which lots of people choose, is to not read statements whatsoever – it likely isn’t as irresponsible as it seems, given that there is not much that you can do, no matter what you might like to think.
Or is there?
Overall, I believe Canadian investors are facing the mother of perfect storms. On one side, we’ve fees for asset management that are among the highest in the world, which coupled with a sizable closet-indexing fraternity in mutual funds and investors traditionally responsible for a higher “home-bias” (the tendency to take a position one’s portfolio mostly in domestic securities) are detrimental to investment success.
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On the other, we’ve record amounts of indebtedness, high real estate valuations (although they are correcting in oil-shocked Alberta), and a poor report card on the savings rate front.
Unless a few of these challenges are resolved, including significant reforms to promote structure, the danger is the fact that a great many people will find ourselves significantly less rich than we thought – compounding the pain sensation of this unfolding bear market.
In the interim, ETFs can help.
While the performance of ETFs is going to be negatively affected by the indiscriminate bear, there’s also ways they are able to provide pockets of relative outperformance even just in times during the distress.
Below you’ll look for a listing of ETFs that fare well when markets behave badly. No surprise, these are mostly of the “Bear” persuasion – meaning they are designed to make money when their underlying exposure loses ground.
Here are several points to remember when it comes to “Inverse” and “Bear+” ETFs:
? These are ETFs made to produce positive returns as their underlying exposure loses ground. If you feel oil prices heading down – a Bear+ ETF on Oil (HOD) provides the ability to participate in that “trade.”
? Inverse are 1X leveraged; “Bear+” 2X leveraged. 2X leveraged are reset every day, that has significant implication for holding periods beyond a day. Commodity ETFs entail additional considerations, such as contango/backwardation, which can significantly impact returns outcomes.
?Inverse volatility (HVI) loses ground when volatile conditions return
?Bear+ on Gold and Silver lose ground as the metals rebound from their own significant bear markets. This is because of their traditional safe-haven appeal, resting on providing diversification from market declines in equities.
? These ETFs are usually best used for short term trading, and their use aligns best with investors with greater risk tolerance and much more of the trading orientation
Yves Rebetez is managing director of ETFinsight.