ETF Investing in a bear market

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In several of my recent articles, I have featured research suggesting where investors might consider investing in light of high inflation, rising interest rates, and Federal Reserve policy decisions; for example, see here. In this article, I review what some experts have advised regarding investments to consider in a bear market.

Background

The overall stock market, as measured by the Vanguard Total Stock Market ETF (VTI), hit its highest price ever on the first trading day of this year. Since then, it has fallen by around 17% (all data in this article is from 5-13). However, some fund categories fared much worse. For example, according to Morningstar.com, the average Large Cap Growth equity fund is down about 25%.

These declines represent a blow to investors’ portfolios. Well beyond what is usually defined as a 10% correction, a decline of 20% or more from a recent high is considered a bear market. Only a handful of fund categories are in positive territory this year, with most down 10-20%. (Look at this performance data for the latest year-to-date results for Vanguard ETFs; Vanguard mutual fund results are similar.) In a bear market, it seems out of the question to expect to make money from your investments, at least in the short term. On the contrary, a more realistic strategy is to try to lose as little as possible until market conditions improve.

I’ve reviewed what a few leading investor publications recommend as your best ETF and fund picks during these uncertain and, so far in 2022, decidedly negative times for fund investing. In addition to listing their specific fund recommendations, I have added some of my own comments, although I am not fully familiar with all of these funds myself.

Kiplinger in The 12 Best ETFs to Fight a Bear Market, offers some of the most specific recommendations I have found, although the recommendations were made over two years ago and some of them are redundant and therefore will not be mentioned below. Also, I won’t mention the funds that are losing more than 10% this year.

Funds

Legg Mason Low Volatility, High Dividend ETF (LVHD)

This fund is made up mostly of high value stocks, which my articles have been recommending for some time, while low volatility stocks tend not to move as much as higher volatility ones. Since downturns are usually accompanied by high volatility, investors are likely to lose less during periods when stocks are falling. Volatility is measured by a statistic called “beta”, with the S&P 500 having a beta of 1. A lower beta means the fund has less volatility than this index, while a beta above 1 has more; LVHD has a beta of 0.8. The fund also has a high dividend yield of 3.62%; see below for more information on high dividend yield funds. It has only lost 2.44 since the start of the year compared to the Dow Jones US Large-Cap Value Total Stock Market index, which has lost 10.83. (All performance data shown is not annualized)

Utilities Select Sector SPDR® ETF (XLU)

Everyone needs water and electricity, and in some cases natural gas, regardless of tough economic times. So, in theory, utility funds shouldn’t suffer a loss of business, unlike other stocks. During periods of equity declines, investors often look for funds with high dividends, and currently, this fund pays a dividend of 2.82%. The fund is one of the few to be up, up 0.45 so far this year. Utilities funds seem to be among the best performers when inflation is high, as it is now. (See my April article Seeking Alpha The Best ETFs to Own When Inflation Is High). Utilities can adjust their prices upward even when the overall economy slips, helping to maintain or improve their profits and dividends.

Consumer Staples Select Sector SPDR® ETF (XLP)

Like utilities, people always need basic consumables such as food and toilet paper, regardless of economic conditions. Also, like utilities, these stocks tend to pay an above-average dividend, currently at 2.25%. The year-to-date return is currently +0.24%.

Vanguard Short Term Bond ETF (BSV)

This ETF invests mainly in government bonds with a smaller share in corporate bonds. Short-term bonds have a low duration, which means they are less affected when interest rates rise compared to longer-term bonds. While the hugely popular Vanguard Total Bond Market index ETF (BND) is down 9.71, BSV is down just 4.10% so far this year.

VanEck Vectors Gold Miners ETF (GDX)

Gold is seen by many investors as an inflation hedge and something that can hold its value in difficult circumstances. However, holding the metal itself does not provide an investor with any dividend. Instead, GDX owns the companies that mine gold. It currently pays a dividend of 1.73%. Its year-to-date yield is -3.59% based on its market price. This compares to a -17.5% return for the S&P 500 Index.

ProShares Short S&P 500 ETF (SH)

This is a fund that I would not recommend at all to the average investor, only to extremely aggressive investors who are usually also market timers. The fund is involved in “short selling” the S&P 500, which means it bets against the index and only does well when it goes down instead of up. So since the S&P 500 is down about 16% this year, it’s up reverse of that or about +15%. Since stocks tend to go up much more than down, you can only make money if you invest just before or during a downturn and exit before stocks resume an upward trajectory. Not for me.

Vanguard High Dividend Yield Index Adm (VYM)

Similar to the first two funds listed above, the benefit of this fund is that it pays a high dividend yield of 2.77%. It also has a relatively low beta of 0.86. It is down about 3% so far this year and has a Large Cap Value oriented portfolio.

Invesco DB Commodity Index Tracking (DBC)

Commodities such as energy, gold, other metals and commodities are believed to perform well during periods of high inflation and bear markets. However, they are highly volatile, indicating above-average risk. DBC is currently offering excellent returns so far in 2022 at around +35% as well as an excellent trailing 12 month return of +53.5%.

Vanguard Dividend Growth Inv (VDIGX)

Down 8.20% this year, this mutual fund is ahead of 95% of funds in its category according to Morningstar and -16% of the S&P 500. Since the fund was praised in a May 2020 article as an excellent fund for a bear market, it returned over 43%, slightly more than the Vanguard S&P 500 index ETF (VOO). It focuses on the Large Mix category.

Discussion

While investors are not necessarily advised to switch from their existing funds to one or more of these bear market pillars, perhaps one or two of the above funds, or similar funds, will give them a boost. idea of ​​where they might be hiding. during this currently steep bear market for aggressive funds, or approaching it, for many of their regular funds.

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