The recent market sell-off from multi-year highs should not be a surprise to many after the 12% gain for the S&P 500 during the first quarter. The market does not go straight up and a pullback of 5% could be healthy to the long-term bull market trend.
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But as it is with every market sell-off, the bears start to come out of hibernation and make the call for another recession and bear market. The past week has been no different and with all the fear mongering around the market, I thought I would appease the worries with some exchange-traded funds (ETFs) for a double-dip scenario.
SEE: How To Pick The Best ETF
The Vanguard Intermediate Term Bond ETF (ARCA:BIV) invests in investment grade bonds offered by the United States government and corporations. There are a total of 1,248 bonds in the ETF with 54% issued by the government and the remainder by corporations. The average duration of the bonds is 6.4 years and the current SEC yield is 2.35%. Since the 2011 market high at the end of April 2011, the ETF is up 8% including dividends. During the same time frame the SPDR S&P 500 ETF (ARCA:SPY) is up 1%. The expense ratio on BIV is 0.11%.
The combination of municipal bonds and high yields has been a winner since the 2011 high with the Market Vectors Municipal High Yield Bond ETF (ARCA:HYD) up 14%, including dividends. Keep in mind the dividends will be tax free for most investors. The ETF is composed of mainly below investment grade municipal bonds and the SEC yield is 5.57%. The tax equivalent yield for an investor in the 35% tax bracket is 8.57%. The ETF charges an expense ratio of 0.35%.
Adding more diversity to the fixed income portion of a portfolio is the PowerShares Emerging Markets Sovereign Debt ETF (ARCA:PCY). The ETF invests in a basket of U.S. dollar-denominated bonds issued by emerging market governments. The ETF is up 9% including dividends from the beginning of May 2011. The ETF has a 30-day SEC yield of 5.31% and it charges an expense ratio of 0.50%.
One of the best known and most heavily followed of the hedging asset classes is gold. The SPDR Gold ETF (ARCA:GLD), which tracks the spot price of gold, is up 4.4% from the May 2011 market high and has been able to outperform U.S. stocks. The ETF has been volatile during this time as it hit a new all-time high and then a new multi-month low. Historically, GLD will not only hedge a bear market, but also adds diversification to an equity and fixed income portfolio.
SEE: The 5 Best Performing Gold ETFs
If a new bear market begins and a recession occurs it will likely be brought on by more trouble in Europe and that would result in the euro falling. To hedge against this occurring there is the Market Vectors Double Short Euro ETN (ARCA:DRR). The ETN returns double the inverse of the performance of the euro on a daily basis. For instance, if the euro falls by 1% on any given day, the ETN should in theory rise by 2%; and vice versa. The ETN is up 23% from the May 2011 high and it charges an expense ratio of 0.65%.
SEE: An Inside Look At ETF Construction
The Bottom Line
The key to hedging a portfolio is to add diversification that allows certain positions to do well during market sell offs. This protection will also not take away from the ability of the portfolio to increase if the stocks move higher. The ETFs mentioned above can help diversify a portfolio and protect against lower overall prices on the global stock market.
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At the time of writing, Matthew McCall did not own shares in any of the companies mentioned in this article.