For those of us wishing to seek protection from Doomsday, here are 5 ETFs that are designed to do well in the event of a catastrophic crash. Not that I believe that there's any chance of any such thing happening, but just as it's considered wise to have a certain percentage of our holdings in gold and silver, it's probably also wise to have a small percentage in these disaster funds. Enjoy the weekend.
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TODAY'S FEATURED STOCK STORY The last time the stock market truly crashed was in March 2020 at the height of the COVID-19 pandemic. During that time, equities sold off sharply, leading to a rapid and unanticipated drop in notable stock market indexes such as the S&P 500, Nasdaq and Russell 2000.
Today investors are on edge anticipating the next crash. A host of factors, including high inflation, rising rates and stocks dipping into bear market territory, have contributed to a strong risk-off attitude.
Investors interested in hedging their portfolios can use a variety of instruments to do so, such as put options, VIX futures and Treasurys. These assets generally have a low-to-negative correlation with stocks and volatility, making them possible diversifiers in trying times. We rounded up a list of five exchange-traded funds, or ETFs, that are built with these features and a degree of crash protection in mind.
Before diving in, however, it's important to note that these ETFs involve a lot of moving parts and many use leverage, which amplifies returns but also risk. Many are designed to be used on a short-term basis and not for long-term holding, says Mark R. Horn, a certified financial planner at Investment Initiatives LLC in West Bloomfield, Michigan. "Always consult with your financial advisor to make sure they fit into your overall financial plan," he says.
With that in mind, here are five ETFs to help you hedge against a stock market crash:
ProShares UltraPro Short QQQ (ticker: SQQQ). The large-cap growth stocks of the tech-heavy Nasdaq-100 have had a slow climb out of the trough they fell into in 2022, when the index fell almost 33% by year's end.
Investors looking to hedge against a potential crash in the Nasdaq-100 can buy SQQQ, which offers daily three-times leveraged inverse performance. The key word here is "daily." Due to how compounding works, holding SQQQ for longer periods of time may result in unpredictable returns. So, holding SQQQ long term is not recommended as the ETF suffers from significant volatility decay, causing its share price to lose value if held for too long.
"Trading north of 100 million shares a day, this ETF offers plenty of liquidity, but comes with a hefty 0.95% expense ratio," Horn says. "One might use this ETF to hedge a position in the widely used ETF QQQ," which tracks the Nasdaq-100 index.
ProShares Short S&P 500 (SH). Another ProShares ETF Horn suggests considering is SH, which aims to provide the inverse of the S&P 500's daily results. Since the S&P 500 comprises large-cap U.S. stocks, SH is "a potentially attractive option for investors looking to hedge against a downturn in this sector of the U.S. economy," Horn says.
Like SQQQ, SH is liquid with nearly 24 million shares trading hands each day on average. Also like SQQQ, it's a bit pricey with a 0.88% expense ratio.
That said, it could still be a good option to hedge "investments you may have in the popular ETFs SPY or VOO, which track the S&P 500 index," Horn says.
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| ETF | EXPENSE RATIO | | ProShares UltraPro Short QQQ (ticker: SQQQ) | 0.95% | | ProShares Short S&P 500 (SH) | 0.88% | | AdvisorShares Ranger Equity Bear ETF (HDGE) | 4.29% | | Toews Agility Managed Risk ETF (MRSK) | 0.97% | | AllianzIM U.S. Large Cap Buffer10 Oct ETF (OCTT) | 0.74% |
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