CHICAGO, July 24, 2012 /PRNewswire/ -- Funds in this article include: AdvisorShares Active Bear ETF (HDGE), Barclays ETN+ S&P VEQTOR ETN (VQT), U.S Market Neutral Anti-Beta Fund (BTAL). Eric Dutram looks at three defensive ETFs that can help to protect a portfolio in a bear market.
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Three Defensive ETFs for a Bear Market written by Eric Dutram of Zacks Investment Research:
Thanks to growing worries over the euro zone and an employment problem in the U.S., many investors are growing skeptical about a broad recovery. Stocks have begun to reflect this pessimism as of late while many portfolio managers and analysts have become increasingly bearish in recent weeks as well.
This issue has further been compounded by sputtering markets in emerging nations around the globe. Countries like China, India, and Brazil were seen as key growth markets for many, but thanks to a general slowdown in these nations too, growth prospects have become pretty hard to come by, leading to a gloomy mood about the global economy (also read Can You Beat These High-Dividend ETFs?).
Given this trend, some investors may want to position their portfolios for the coming storm, especially if growth rates continue to decline in the developed world. While looking to consumer staples, utilities, or other safe sectors is certainly one way to go, some investors could be better served by taking an ETF approach to the problem.
By doing this, investors can gain basket exposure to a number of securities, potentially reducing risk in the process. Additionally, many ETFs have been able to open up new strategies to every day investors, allowing many to position their portfolios for adverse environments in ways that were impossible just a few years ago (see more in the Zacks ETF Center).
Below, we highlight three of these great defensive ETFs that could be used in a bear market. Each applies an interesting or unique methodology in order to protect investors, potentially shielding at least some of a portfolio against a weak economic environment should the trend continue to be bearish in the global economy:
AdvisorShares Active Bear ETF (HDGE)
This ETF goes short in a variety of equities hopefully targeting those that have low earnings quality. By focusing on these securities that have potentially weak fundamentals, the product could be an interesting pair to a long portfolio, as these stocks could underperform in a down market and thus result in strong profits for holders of HDGE.
In order to find these potentially weak firms, the managers in HDGE look to the income statement for clues. They focus in on aggressive revenue recognition, inventory issues, reserve concerns, serial charges, and tax issues, among others, to pinpoint companies that may be masking weakness (read HDGE: the Active Bear ETF under the Microscope).
Once the companies are indentified, the team then looks at the overall market, technical factors, and risk levels in order to pick which securities to include in the fund. Currently, consumer discretionary firms, technology, and industrials make up the three biggest weights in the fund.
Unfortunately, however, the fund does charge a pretty hefty fee, thanks in large part to the short interest expense. Due to this 1.44% fee, net costs come in at a whopping 3.29% for the fund, among the highest in the ETF world.
While this is unsettling, investors should note that the product has crushed the S&P 500 over the past three months, outpacing the benchmark by over 1,200 basis points (after fees) in the time period.
For the rest of this ETF article, please visit Zacks.com at: http://www.zacks.com/stock/news/79299/three-defensive-etfs-for-a-bear-market
Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.
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Contact: Eric Dutram
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