Opinion: 8 Ways to Protect Your Money When You Think Stocks Are Going Lower

I know what you’re thinking: why, oh why, didn’t we all just “sell in May and walk away,” as that stupid Wall Street adage suggested?

Many other articles will work out the hows and whys behind the recent volatility. Here we talk about possible actions via tactical alternatives and defensive strategies that can be attractive in the current market.

Don’t worry about learning advanced options or futures trading techniques. All of these tips are ETFs that are liquid and easily traded in most standard brokerage accounts. Just remember that, as with all things, you should do your own research and take action based on your personal goals – not what an expert tells you.

Empty the market

Do you want to short the stock market because you think it will continue to fall? The ProShares Short S & P500 ETF SH,
is a simple and liquid way for retail investors to see their investments rise when the stock market falls. Through a system of derivative contracts, the roughly $2 billion fund aims to track the inverse of the daily movement of the S&P 500 Index.

This isn’t a faithful 1-to-1 reversal of the S&P over the long term, but it’s pretty damn close. Case in point, this ETF is up 7.2% over the past month, while the S&P 500 is down 7.4% over the same period through Thursday’s close.

There are other types of “inverse” funds that short the market. For example, if you want a more tech-focused fund to bet on the downside of that particular sector, consider the tactical Tuttle Capital Short Innovation ETF SARK.
This roughly $350 million ETF aims to provide the opposite of the fad investments that make up the once-fancy and currently-battered ARK Innovation ETF ARKK.
This inverse fund is up 27.7% over the past month.

When the stock market goes up, these inverse funds naturally go down. And in the case of SARK, it could happen just as quickly.

Tail risk ‘insurance’

The Cambria Tail Risk ETF TAIL is more of an insurance policy than a way to build your nest egg.
is a unique vehicle that focuses on out-of-the-money put options purchased in the US equity market, along with a heavy allocation to low-risk US Treasuries.

The idea is that these longshot options don’t cost much when the market is stable, but are a type of insurance you pay for to protect yourself from disasters.

And just like your car insurance, if you do have an accident, you’ll be covered and get a payback to make up for your losses. As evidence of this approach: While the Dow Jones lost more than 1,000 points on Thursday, TAIL gained 2.2%.

Over the past year, however, it’s down more than 11%, much more than the S&P 500’s 4% drop. That’s the price you pay for this type of insurance when it’s not needed – but in volatile times like these, the backstop comes in handy.

Covered calls

Many investors reduce their risk profile or achieve higher returns by using options. But if you’re not interested in do-it-yourself options trading, a fund like the JPMorgan Equity Premium Income ETF JEPI,
might be worth a look. JEPI is a $9 billion fund that has exposure to the S&P 500, but its managers also sell options on US large-cap stocks using a strategy known as “covered calls.”

In short, selling these options contracts limits your upside potential if markets tear higher, but guarantees cash flow if markets move sideways or down. As a result, the JEPI has returned about 8.0% over the trailing 12 months — and while it’s down 5.5% over the past month, that’s not as bad as the S&P’s 7.5% drop over the same month Period.

There is also the Global X NASDAQ 100 Covered Call ETF QYLD,
a roughly $7 billion ETF tied to the Nasdaq 100 index, in case you’d rather apply that strategy to this tech-heavy benchmark instead.

Low volatility ETFs

Low-volatility funds offer a twist on traditional investing strategies by overlaying a screen that keeps the fastest-moving picks away. Of course, this means they underperform during red-hot periods of the market, but tend to be “less bad” when things get stormy.

Take the $9 billion Invesco S&P 500 Low Volatility ETF SPLV,
This fund has underperformed over the three to five year period thanks to a generally benign environment for stocks where volatility has been on the upside. But in 2022, it’s down 5.2%, much less than the S&P 500’s 13% plunge.

Other “low vol” variants include the globally focused iShares Edge MSCI EAFE Min Vol Factor ETF EFAV,
which offers lower volatility exposure to Europe, Australasia and the Far East.

(Bonds with near) immediate maturity

Yes, the interest rate environment is volatile. But if you shorten your duration on bonds that are due to mature soon, you can generate some income and largely avoid the risk of rising interest rates.

Keep in mind that while the popular iShares 20+ Year Treasury Bond ETF TLT
has plunged more than 22% in 2022 thanks to rising interest rates, its sister fund, the iShares 1-3 Year Treasury Bond ETF SHY,
is down just 3.1% — and has a yield of about 2% to make up for it.

If you want to look beyond rock-solid Treasuries to short-term corporate bonds, the actively managed Pimco Enhanced Short Maturity Active ETF MINT is for you.
(MINT) is down just 1.85% this year and is generating a similar amount in annual payouts. They basically stay where they are.

None of the short-term bond funds will help you increase your nest egg significantly, but if you want capital preservation with a bit of income, then funds like these are worth checking out.

Interest Rate Bonds

Another approach for bond markets is to gain a foothold in bonds, but layering strategies designed to offset headwinds from rising interest rates. That’s what a fund like the approximately $379 million WisdomTree Interest Rate Hedged US Aggregate Bond Fund AGZD,
seeks to achieve this by owning investment-grade corporate and government bonds – but also by being short US Treasuries. The idea is that the companies will provide the earnings and the short positions will offset the potential fall in capital value.

This may sound counter-intuitive, but the idea is that the corporate bonds provide the income stream and the short positions are theoretically offset against these long positions to offset the potential fall in capital value.

Theoretical is the key word as it is not an exact science. But so far that approach seems to be working, as the fund is down 1.45% in 2022 while the rest of the bond market lay in tatters — all while returning about 2% to shareholders based on the current annualized rate.

Ride at increasing rates

What if, amidst the current interest rate volatility, you want less of a hedge and more of an upplay on bonds? Then look no further than the roughly $200 million Simplify Interest Rate Hedge ETF PFIX.

The Fund has a large position in OTC interest rate options, which are expected to rise in value as long-term interest rates rise. And given the Fed’s recent moves, that strategy has paid off in large measure.

How large? Well, this ETF is up 5.4% on Thursday as Wall Street digested the Fed’s move and other developments. And year-to-date, it’s up 63% thanks to a steady rise in bond yields.


While stocks and bonds play a role in a diversified portfolio regardless of the broader economic landscape, it’s becoming increasingly important to recognize that these aren’t the only two asset classes.

One of the easiest ways to get diversified and hassle-free exposure to commodities through an exchange-traded product is with the Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF PDBC.
This $9 billion fund includes the world’s most popular commodity-linked futures contracts, including aluminum, crude oil, corn, gold, wheat and others. And best of all, it’s structured to protect you from tedious paperwork and the dreaded K-1 tax form that comes with some commodity-linked investing strategies.

There are of course specific commodity funds if you want a specific flavor – the $68 billion SPDR Gold Trusty GLD,
for example, or the red-hot United States Natural Gas Fund UNG,
that’s up a staggering 140% year-to-date. However, if you want a defensive play rather than trading based on a single commodity, diversified funds like PDBC are a better option.

standard index funds

Are these options just confusing you? Then remember – over the long term, stocks go up. Rolling 10-year returns have been positive for stocks dating back at least to the Great Depression. So the real cure for a portfolio in the red may just be patience.

Consider that the bear market lows of the financial crisis included a reading of 666 for the S&P 500 on March 6, 2009. Today that benchmark is over 4,000. And even if you had the absolute worst timing before the crisis and invested everything at the pre-Lehman highs, you still would have doubled your money more given the index’s closing level of 1,565 in 2007.

So maybe consider a long-term buy in old favorites like the SPDR S&P 500 Trust SPY,
or your favorite index fund along with one of these more tactical options. As the old saying goes, you can get rich when you’re greedy when others are afraid — even if it takes a while to recoup your investment.

Jeff Reeves is a MarketWatch columnist. It does not own any of the funds mentioned in this article.

Now read: These 13 Nasdaq 100 stocks have seen the biggest swings up and down after the Fed hiked rates. Should you be intimidated? Opinion: 8 Ways to Protect Your Money When You Think Stocks Are Going Lower

Brian Lowry

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