The S&P 500 lost nearly 40% as the pandemic and lockdowns swept the country earlier this year. But the good news is that you can be better prepared if a second wave of COVID-19 emerges.
There are over 4 million coronavirus cases in the U.S. today. Investors are gritting their teeth in wait of a second outbreak as warm weather fades. Yet the stock market is in the middle of a white hot rally that has already sent the Nasdaq up 56% since March lows, smashing through its all-time highs.
For some investors, stocks have surged too high, too fast, and they want to know what to do if the market crashes again.
Now, we’re not exactly predicting another stock market crash. As we’ve been telling readers, this rally has plenty of legs. But it pays to have a hedge in place.
Putting a small percentage of your portfolio into an “insurance” play in case the worst happens is a smart move.
One of the best ways to beat a market reversal is by investing in an asset class that does the opposite of what the market does. That’s an inverse exchange-traded fund (ETF), otherwise known as a “short” or “bear” ETF.
These ETFs contain a variety of stocks and bonds that move inversely to the market. This is arguably a safer, more accessible way to play a market downturn than short selling. With short selling, you take a short position in an individual stock, which means you need a margin account to borrow the shares.
Short selling can be costly. High short interest on an individual stock can bump the cost of borrowing shares above 3%. On top of that, the risk is infinite if the stock continues upward. No thanks.
That’s not the case with inverse ETFs. Anyone with a brokerage account can invest in them. And with inverse funds, the expense ratio is often less than 2%. Of course, these aren’t “set it and forget it” plays. They’ll lose value as long as stocks climb, so you want to be strategic.
But if the market does tumble, these shares will pop higher, giving you a tidy profit.
Here are some of the top inverse funds to invest in now, if we’re headed for a second stock market crash in 2020…
No. 4: ProShares Short S&P 500
We mentioned the S&P 500 losing almost 40% earlier this year. But around the same time, ProShares Short S&P 500 (NYSEArca: SH) gained 45% from February to March.
This ETF is what it sounds like. When you invest, you are expecting the S&P 500 to tank. That is, if the 500 biggest companies in the U.S. struggle on average, this fund moves in the opposite direction.
At worst, the fund hedges you. At best, it profits.
This is also one of the biggest inverse funds out there, with over $4 billion in assets. This one comes in at $21.27 per share today.
But you aren’t limited to ETFs based on indices…
No. 3: ProShares Short Oil & Gas ETF
One great thing about ETFs is that they come in varieties. Beyond one that mirrors the S&P 500, you can do the same with the oil and gas industry.
ProShares Short Oil & Gas ETF (NYSEArca: DDG) would be a great opportunity to get ahead of the curve, considering what the price of oil did back in March. U.S. oil prices crashed below zero.
A price war between Russian and Saudi Arabia came in the wake of lower fuel demand from COVID-19 to crush oil. But the future could bear even more on the price of oil.
Not only is it possible we’ll see another oil demand lapse, it’s also been a watershed year for electric vehicles. Tesla Inc. (NASDAQ: TSLA) is up 243% on the year, and Workhorse Group Inc. (NASDAQ: WKHS) is up 427%.
Companies like these are only seeing the beginnings of their growth. When this industry is fully developed, lesser demand for fossil fuels won’t be just a temporary thing.
In either event, it may be good to have this inverse fund in your pocket. Shares go for $29.50 today.
No. 2: MicroSectors FANG + Index Inverse ETN
You can inverse the biggest tech stocks in the United States with MicroSectors FANG + Index 3X Leveraged (NYSEArca: GNAF). This one is a play on stocks like Facebook Inc. (NASDAQ: FB), Amazon.com Inc. (NASDAQ: AMZN), and Alphabet Inc. (NASDAQ: GOOGL) going lower.
Tech stocks tended to hold up during the first COVID-19 lockdowns, and they’ve been the biggest leaders of the latest rally. But Congress has also been conducting an antitrust investigation into FAANG stocks for more than a year now.
We have been getting closer to possibly seeing more regulation on these firms as the companies’ CEOs testify before the House Antitrust Committee this week.
Depending on how that goes, these companies could be in for a rude awakening.
With these stock soaring near all-time highs, a short-term correction wouldn’t be unheard of.
It might be worth looking into this fund for $23.95 a share. But remember, this is a leveraged fund, so it will move up and down even faster. If you’re bearish on big tech, keep an eye on this one.
No. 1: Invesco DB U.S. Dollar Index Bearish Fund
This one is not a broad market index or sector – it’s the U.S. dollar itself.
Invesco DB U.S. Dollar Index Bearish Fund (NYSEArca: UDN) mirrors Treasury bonds. That means, if the dollar declines, this fund goes up. And the dollar is already at a 10-year low.
Current interest rates are around 0.25%, and there has even been talk of negative rates this year as the markets have become more volatile.
The dollar could also be viewed as less reliable down the road. If economic concerns prevail, it could continue to lose value on the international stage.
That would make this fund potentially worthwhile at $21.07 a share.
— Mike Senger
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Source: Money Morning