Thursday was a day most investors would sooner forget. We all read the headlines proclaiming it to be the market’s worst day since February 2018, with most companies finishing in the red, and more than $60 billion wiped off the ASX. And with trade tensions between China and the US continuing to drive volatility on Wall Street, plus increasing talks of an impending global recession, it doesn’t look like smooth sailing ahead.
But despite all this, there are still plenty of ways to protect your portfolio from a severe downturn in the economy. In fact, there are even some savvy investors who might find a way to turn a market correction into a money-making opportunity. Here are three ways you can reduce your portfolio volatility in a crisis, and possibly even still generate a positive return.
1. Inverse ETFs
Exchange traded funds (or ETFs) are pooled investment vehicles that trade on the stock exchange just like ordinary shares. Normally they are designed to passively track a benchmark or index, such as the overall performance of the top 50 or 100 companies listed on the ASX. The success of the fund is measured by how closely its performance replicates its chosen benchmark.
However, inverse ETFs are designed in such a way that they move in the opposite direction to their benchmarks. Betashares have a number of inverse ETFs that currently trade on the ASX, and they all bucked the downward trend on Thursday to deliver strong returns.
The Betashares Australian Equities Bear Hedge Fund (ASX: BEAR) is seeks to profit from a declining Australian share market by generating returns that are negatively correlated with the return of the ASX200. It increased 2.7% on Thursday.
The Betashares Australian Equities Strong Bear Hedge Fund (ASX: BBOZ) is a riskier version of the standard Bear ETF as it uses leverage to magnify returns. It surged 6.8% higher in Thursday trading.
And for some international exposure, the US Equities Strong Bear Fund (ASX: BBUS) attempts to profit from declines in the US share market. It also jumped 6.5% higher on Thursday.
In times of market crisis, investors flock to safe haven assets like gold and other precious metals as these commodities tend to safeguard value. You can gain exposure to gold through gold ETFs such as ETFS Physical Gold (ASX: GOLD), or by investing in pure play gold miners.
The GOLD ETF increased by 1.2% on Thursday, while gold miners like St Barbara Limited (ASX: SBM), Evolution Mining Limited (ASX: EVN) and Newcrest Mining Limited (ASX: NCM) also ended yesterday in the green.
3. Bond ETFs
Fixed income instruments like bonds are viewed as lower risk than equities. So when the share markets become volatile, risk-averse investors tend to dump their stocks and buy up bonds.
The easiest way for individual investors to trade in bonds is again through ETFs. There are loads of fixed income ETFs that currently trade on the ASX: same target higher yielding corporate bonds, while others focus on lower risk government debt.
For example, there is the Vanguard Australian Government Bond Index ETF (ASX: VGB), which does basically what it says on the tin: invests in lower risk government bonds. It also finished slightly in the green on Thursday.
The above strategies can offer downside protection to your portfolio during times of market upheaval. But they are not without risk. When the share market is performing well, inverse ETFs will decline in value – and in the case of leveraged ETFs like Betashares Australian Equities Strong Bear Hedge Fund, these negative returns will be magnified.
However, these types of securities are great diversifiers, and if used in the context of an overall portfolio strategy they can help you rest a little easier when markets become volatile.
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Motley Fool contributor Rhys Brock has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2019