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ETFs to handle a bear market

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During economic downturns, incorporating diversification in your portfolio is a strategy that may reduce risk while investing.

One type of investment to consider in a bear market is an exchange-traded fund (ETF).

"An ETF is a basket of securities that are pooled together and they operate much like a mutual fund," Rachelle Tubongbanua, a private wealth adviser at U.S. Bank Wealth Management explained. 

She said that investors can purchase or sell shares of the fund on the stock exchange the same way they can with a regular stock. Also, Tubongbanua said ETF funds typically track a particular index or sector and include a diverse mix of assets, including domestic and international stocks, bonds, and commodities.

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"A single fund can contain hundreds or even thousands of securities, which is why they are a good option if you’re looking for diversification," Tubongbanua told FOX Business. "Aside from this, ETFs typically have lower operating expense ratios than a mutual fund, provide the trading flexibility/liquidity similar to stocks and are tax efficient compared to actively managed funds."

What is a bear market, and why are ETFs a wise investment?

According to Tubongbanua, a bear market is when the broad market experiences a sustained drop in prices over a period of time. This typically means a 20% or more drop from its recent highs, she said.

"While there are a multitude of factors that lead to a bear market, often they are driven by negative consumer sentiment and a weak or slowing economy," Tubongbanua said.

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A woman shops for groceries at Alfalfa’s SuperMarket, located at 900 East 11th Avenue in Denver, Colorado, in 1999. (John Preito/The Denver Post via Getty Images / Getty Images)

ETFs can be a great tool during a bear market as they provide diversification, said Tubongbanua, which helps to reduce the volatility in a portfolio at a lower cost and at a lower entry point.

"A strategy that we have been employing recently with some of our clients is to take advantage of the downturn in the market to roll over legacy mutual funds into a more tax-efficient/cost-effective ETF fund as the opportunity arises," she added.

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What ETFs are a fit for a bear market?

Bryan Masucci, director at ETF Managers Group based in San Diego, has suggested two ETFs to consider in a bear market.

1. ETFMG Prime Junior Silver Miners ETF

According to Masucci, ETFMG Prime Junior Silver Miners ETF – with ticker SILJ – is the first and only ETF to give investors exposure to small-cap silver miners, currently with 55 holdings in the portfolio.

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Why it’s a pick, according to Masucci: "Precious metals have been used by investors during bear markets as the asset class is uncorrelated to most broad equity markets. Silver is the most electrically conductive metal in the world and has significant industrial applications (solar panels, smartphones, semiconductor chips). As a new era of green energy is upon us, the adoption of solar panels and electric vehicles could cause an increase in the demand for silver."

Ticker Security Last Change Change %
SILJ ETF MANAGERS TRUST PRIME JUNIOR SILVER MINERS 8.98 +0.11 +1.24%

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2. ETFMG Sit Ultra Short ETF

According to Masucci, ETFMG Sit Ultra Short ETF – with ticker VALT – is an actively managed fund that invests in short-duration, investment-grade debt securities of varying maturities. He says VALT is designed to seek current income returns in excess of short-term cash equivalents along with the preservation of capital and an emphasis on daily liquidity.

New York Stock Exchange is seen on Wall Street

American flags fly outside the New York Stock Exchange, Friday, Sept. 23, 2022, in New York. (AP Photo/Mary Altaffer / AP Newsroom)

He reports as of Oct. 12, VALT has a 30-day SEC yield of 4.26%.

Ticker Security Last Change Change %
VALT ETF MANAGERS TRUST ETFMG SIT ULTRA SHORT ETF 47.92 +0.11 +0.23%

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Why it’s a strong pick, per Masucci: "As the bear market progresses and the market is at or close to the bottom, tech infrastructure funds may offer good long-term opportunity. These include HACK, IPAY, GAMR, IVES. No matter the part of the market cycle we are in, there is a constant in technology in that we, as a society, will continue to implement technology into our businesses and daily lives to incorporate the efficiency it offers."

Ticker Security Last Change Change %
HACK ETF MANAGERS TRUST PRIME CYBER SECURITY ETF US 44.06 +0.14 +0.33%
IPAY ETF MANAGERS TRUST PUREFUNDS ISE MOBILE PAYMEN 38.56 -0.06 -0.16%
GAMR ETF MANAGERS TRUST WEDBUSH ETFMG VIDEO GAME TE 49.63 -0.37 -0.74%
IVES ETF MANAGERS TRUST WEDBUSH ETFMG GLBAL CLOUD 28.03 +0.13 +0.47%

"Technology runs the physical infrastructure of the world we live in, the business infrastructure we all work in, and is the backbone of socialization with one another," he added. "Cybersecurity, mobile payments and future payments technologies, video games, and cloud infrastructure will continue to be important in most, if not all, aspects of life moving forward."

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