Hiding Places: Profitable ETFs During the Coronavirus Bear Market

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In a recent piece on building a portfolio that can withstand any market environment, we discussed how many considered a 100% stock portfolio as the place to be during the last ten years. Then came a global pandemic and oil price war that set stocks back about 30% year to date. Disappointingly, other asset classes that typically provide a cushion when stocks sell off have also been affected: corporate bonds, gold and even bitcoin have all logged some serious drops in the first quarter of 2020.

The recent bear market may have you wondering if there has been anywhere to hide beyond cash and puts. The good news is yes, there have been some profitable strategies in 2020. Below is a list of ETFs in various asset classes that have produced a positive return during the recent market carnage.

While these strategies have performed well thus far, keep in mind many could reverse if stocks find a bottom. Safe havens and bearish strategies tend to outperform when riskier assets like stocks sell off, but investors will sell out of them as soon as they perceive better return opportunities elsewhere. Do your own research and consider issues like interest rates, currency exchange rates and the outlook for the global economy before putting money to work in any of these ETFs.

Note: All YTD performance numbers listed below are as of 3/19/20 market close according to Morningstar.

AdvisorShares Ranger Equity Bear ETF

Ticker: HDGE
Category: Bear Market
YTD performance: +35.26%

This is an actively managed bear market ETF strategy that shorts the companies with the weakest fundamentals in the market as judged by the portfolio managers. As expected, this fund has flourished during the current bear market, rising even more than the broader market has fallen. For the ultimate bears out there, this is your fund.

Compare this fund’s performance to SH, a strategy that simply inverses the performance of the S&P 500, which has gained just 26% YTD. The difference in performance is largely attributed to the “alpha” generated by HDGE’s active management. Instead of simply shorting the S&P 500, HDGE seeks out the most problematic companies that the portfolio managers think will fall further than the market overall. HDGE has outperformed SH not just during this period, but also in 2018, the last notable down period for the market, where it nearly doubled the return of SH.

While this strategy has performed brilliantly over the past few months, keep in mind the long-term chart for the strategy is decidedly negative. Generally, most bear market funds should be held only for short-term periods where you are worried about the outlook for stock markets. Alternatively, you can couple HDGE with a high quality ETF that goes long on equities such as DGRO to create your own version of a long/short fund, where you hold long equities for the majority of your portfolio and have a smaller portion dedicated to HDGE to cushion you during times like this.

AGFiQ US Market Neutral Anti-Beta ETF

Ticker: BTAL
Category: Long/short equity
YTD performance: +16.30%

Speaking of long/short funds, BTAL has also done a great job living up to its billing of providing downside protection during volatile markets. Unlike HDGE, which only shorts stocks, BTAL goes long on low-beta stocks while shorting high-beta stocks in equal measure. Beta is a term that measures how volatile a stock is compared to the overall market. This means you can hold BTAL not only during bear markets, but also when your outlook suggests that lower risk stocks will outperform higher risk ones.

BTAL has performed consistently well through the current coronavirus sell-off. It may be an increasingly interesting strategy as the market reorders itself in the coming months and years and investors start to prefer boring and predictable companies compared to aggressive, high growth–but less certain–plays of the last bull market.

BTAL can potentially serve as a good complement to a traditional stock fund, or as a hedge against equity volatility, and provide your portfolio with some short equity exposure without needing to be constantly managed the way a pure short-only fund such as HDGE would need to be.

WisdomTree Bloomberg US Dollar Bullish ETF

Ticker: USDU
Category: Multi-currency
YTD performance: +10.06%

The coronavirus market sell off has caused investors to sell almost everything. Stocks, of course, but also bonds, precious metals, REITs and many other asset classes that investors typically consider “defensive.”

The only consistent safe haven during this time has been the good old fashioned greenback. In fact, demand for US dollars is so high globally, that the outlook for emerging market economies is increasingly dire as they struggle to fund their outstanding dollar denominated debt.

One way investors can potentially take advantage of the situation is investing in a fund that tracks a dollar index against other currencies, such as USDU. This fund is an actively managed strategy that seeks to provide a return in excess of the Bloomberg Dollar Total Return Index. The index rises and falls based on the performance of the US dollar against a basket of global currencies.

Unlike bear market or short funds, this strategy has been profitable for six of the seven years it has existed and performs roughly in line with a higher risk corporate bond fund. So far, 2020 is on track to be its best year yet, returning more than 10%.

This strategy might appeal to those who want diversification beyond stocks and bonds and have a strong outlook that the US dollar will continue to be a preferred destination for global currency investors. The main risk in holding this strategy is if economic conditions and monetary policy here in the US deteriorate in relation to other economies, which may trigger a reversal of the trend and investors seeking to park their cash in other currencies such as the Yen, Euro or even Chinese Renminbi.

iShares 20+ Year Treasury Bond ETF

Ticker: TLT
Category: Long-duration treasury bonds
YTD performance: +9.79%

At the outset of this bear market there was one clear winner: TLT and other fund strategies that invest in the longest duration treasury bonds. Interest rates had already been on a long march downwards, and as we entered the bear market, TLT began to not only outperform stocks year-to-date, but also over periods of one and three years. As the bear market reached new depths, TLT even outperformed the S&P 500 over a trailing five year period.

However, as we noted, even the safest of havens experienced some selling during this period of market turbulence and TLT has come down back to earth, while still producing a healthy high single digit return for 2020. Part of the turbulence may be related to good old fashioned profit taking as investors rebalance some gains from this strategy into beaten down stocks and corporate bonds. More troublingly, credit markets have experienced liquidity issues, including with treasuries, necessitating extraordinary Fed actions that are ongoing to keep markets functioning as they should.

The main risk to keep in mind when investing in long-term treasuries strategy such as TLT is that the gains we have seen over the past five years could vanish just as quickly if interest rates were to rise. That’s because the main determination of the prices of long-duration bonds are interest rates. As interest rates are cut, yields on these bonds move lower, making previous bonds held by the fund more valuable.

While many market participants expect interest rates to head even lower, perhaps to negative territory in the near term, you do not want to be holding this fund in an inflationary environment where interest rates could hike up dramatically.

So, while it may seem doom and gloom everywhere right now, the above four ideas show you that there is always a bull market somewhere, even if that bull market is most notable in bear market funds.