The 12 Best ETFs to Battle a Bear Market
Investors worried about the next market downturn can find plenty of protection among exchange-traded funds (ETFs).
Investors who are fearful that 2022's market downturn is about to get a lot worse can find plenty of protection among exchange-traded funds (ETFs). Individual stocks can carry a lot of risk; on the other hand, mutual funds don't have quite the breadth of tactical options. But if you browse through some of the best ETFs geared toward staving off a bear market, you're sure to find a bounty of options that mesh well with your investing style and risk profile.
Entering 2022, Wall Street keyed in on a multitude of risks, among them the threat of high inflation and numerous Federal Reserve interest-rate hikes. So far, both fears have played out – plus, stocks have also been bombarded by other issues, such as Russia's war in Ukraine and fresh COVID outbreaks in China.
That has sent the Nasdaq into bear-market territory and has the S&P 500 on the brink. And there are reasons to believe things could get even worse from here.
"U.S. stocks have suffered the biggest year-to-date losses since at least the 1960s. That's ignited calls to 'buy the dip.' We pass, for now," says a team of BlackRock Investment Institute strategists. "Valuations aren't much cheaper given rising interest rates and a weaker earnings outlook, in our view. A higher path of policy rates justifies lower equity prices. We also see a risk the Fed will lift rates too high – or that markets believe it will. Plus, margin pressures are a risk to earnings."
How nasty this bear-market move gets remains to be seen. But if you're inclined to protect yourself from additional downside – now, or at any point in the future – you have plenty of tools at your disposal.
Here are a dozen of the best ETFs for a continued bear market. These ETFs span a number of tactics, from low-volatility stocks to bonds to commodities and more. Each has outperformed the S&P 500 so far in this market downturn – and several have even put up some impressive gains.
Data is as of July 12. Dividend yields represent the trailing 12-month yield, which is a standard measure for equity funds.
Invesco S&P 500 Low Volatility ETF
- Type: Low-volatility stock
- Assets under management: $10.4 billion
- Dividend yield: 2.2%
- Expenses: 0.25%
One of the most popular types of ETFs for a bear market is low-volatility funds. The objective is pretty straightforward: Invest in stocks with low volatility, which in a down market should limit downside.
The Invesco S&P 500 Low Volatility ETF (SPLV, $62.04) is a pretty straightforward fund that tracks the S&P 500 Low Volatility Index, which is composed of the 100 S&P 500 components with the lowest realized volatility over the past 12 months. It then assigns weights to each stock based on its volatility (well, lack thereof).
One popular way to measure volatility is called "beta," which tracks a security's volatility compared to some benchmark. The benchmark here is the S&P 500, and the benchmark will always have a beta of 1. SPLV has a beta of 0.70, which implies the fund is roughly 30% less volatile than the broader market.
This doesn't guarantee SPLV will outperform during a market shock. In fact, during the quick COVID bear market, this low-volatility ETF underperformed the S&P 500 by 2 percentage points. But Invesco's ETF does tend to do pretty well during longer periods of tumult. Take June 2015 to June 2016, when the market's roller-coaster movement generated a marginally negative return; SPLV was up by nearly 9%. And so far this year, the fund has been a relative champ, off a little less than 10% versus the S&P 500's 18% decline.
The portfolio is bound to change over time depending on which parts of the market are more volatile than others, but for now, it's unsurprisingly heavy in utility stocks (26%) and consumer staples (21%) – two defensive, high-yielding sectors. (Also, this is a bit of foreshadowing.)
Legg Mason Low Volatility High Dividend ETF
- Type: Low-volatility dividend stock
- Assets under management: $594.7 million
- Dividend yield: 2.7%
- Expenses: 0.27%
The Legg Mason Low Volatility High Dividend ETF (LVHD, $37.93) is roughly the same idea, but with an added focus on dividends. The ETF invests in roughly 50 to 100 stocks selected because of their lower volatility, as well as their ability to generate income.
LVHD starts with a universe of the 3,000 largest U.S. stocks – with a universe that large, it ends up including mid- and small-cap stocks, too. It then screens for profitable companies that can pay "relatively high sustainable dividend yields." It then scores those stocks higher or lower based on price and earnings volatility. Every quarter, when the fund rebalances, no stock can account for more than 2.5% of the fund, and no sector can account for more than 25%, except real estate investment trusts (REITs), which are capped at 15%.
Right now, LVHD's top three sectors are the three sectors many investors think of when they think of defense: utilities (23%), consumer staples (20%) and real estate (11%). They're represented by top holdings such as Philip Morris (PM), American Electric Power (AEP) and Vici Properties (VICI).
This Legg Mason ETF's dual foci of income and low volatility should make it one of the best ETFs to own during a bear market – indeed, it's down just 5% YTD, and that's before including dividends.
The flip side? It tends to get left behind once the bulls pick up steam.
iShares Core High Dividend ETF
- Type: Dividend stock
- Assets under management: $13.1 billion
- Dividend yield: 3.3%
- Expenses: 0.08%
Actually, investors could do well in this bear market by simply holding dividend stocks period.
"Dividend stocks look particularly attractively valued, in our view," says a team of Goldman Sachs strategists. "Dividend stocks typically outperform in environments of elevated inflation. In addition, dividends currently benefit from the buffer of strong corporate balance sheets. As one topical example, at the same time as guiding margins lower, Target (TGT) hiked its dividend by 20%.
The iShares Core High Dividend ETF (HDV, $104.40) is an inexpensive, straightforward way to gain access to a bundle of high-yielding dividend stocks. HDV currently holds 75 stocks that have been able to sustain above-average payouts and have also passed several financial-health screens.
This iShares ETF gives investors a somewhat different look than the low-volatility ETFs above. Healthcare (23%) and energy (20%) are the top two sector weightings, while financials (10%) also enjoy double-digit exposure. That said, consumer staples (17%) and utilities (8%) do carry some heft.
It's worth noting that the heavy energy exposure has been a boon to HDV so far; on the flip side, significant relief in oil prices at some point could hold this ETF back.
Vanguard Utilities ETF
- Type: Sector (Utilities)
- Assets under management: $5.8 billion
- Dividend yield: 2.7%
- Expenses: 0.10%
No market sector says "safety" more than utilities.
Scared about the economy? Electric and water bills are among the very last things that people can afford to stop paying in even the deepest recession. Just looking for income to smooth out returns during a volatile patch? The steady business of delivering power, gas and water produces equally consistent and often high dividends.
"Utility earnings are likely to grow in 2022, unlike most other sectors," says Jay Rhame, CEO of Reaves Asset Management. "Many companies recently have reiterated guidance for mid-to-high single-digit earnings growth this year, in stark contrast to the many companies that cut guidance in the last few months."
The Vanguard Utilities ETF (VPU, $155.61) is one of the best ETFs for accessing this part of the market – and, at 0.10% in annual expenses, it's one of the cheapest.
VPU holds more than 60 utility stocks – including NextEra Energy (NEE), Duke Energy (DUK) and Southern Co. (SO) – that generate electricity, gas, water and other utility services that you and I really can't live without, no matter how the stock market and economy are doing.
This isn't really a high-growth industry, given that utility companies typically are locked into whatever geographies they serve, and given that they can't just send rates through the ceiling whenever they want. But utilities typically are allowed to raise their rates a little bit every year or two, which helps to slowly grow their profits and add more ammo to their regular dividends.
"Dividend strength is helping utilities continue to be an attractive defensive play," Rhame says, "and the current regulatory environment and push of public spending on renewables makes the asset class particularly favorable."
Vanguard Utilities, which is up marginally on a total-return basis (price plus dividends) in 2022, likely will lag when investors are chasing growth. But it sure looks great whenever panic starts to set in.
Consumer Staples Select Sector SPDR Fund
- Type: Sector (Consumer staples)
- Assets under management: $15.0 billion
- Dividend yield: 2.3%
- Expenses: 0.10%
You need more than just water, gas and electricity to get by, of course. You also need food to eat and – especially amid a viral outbreak – basic hygiene products.
That's what consumer staples are: the staples of everyday life. Some are what you'd think (bread, milk, toilet paper, toothbrushes), but staples also can include products such as tobacco and alcohol – which people treat like needs, even if they're not.
Like utilities, consumer staples tend to have fairly predictable revenues, and they pay decent dividends. The Consumer Staples Select Sector SPDR Fund (XLP, $71.92) invests in the 30-plus consumer staples stocks of the S&P 500 – a who's who of the household brands you've grown up with and know. It's market cap-weighted, meaning the larger the company, the more money XLP invests in the stock. Thus, it holds a significant 15% chunk of Procter & Gamble (PG), which makes Bounty paper towels, Charmin toilet paper and Dawn dish soap. Coca-Cola (KO) and PepsiCo – the latter of which also boasts Frito-Lay, a massive snacks division – combine to make up more than 20% of assets.
The Consumer Staples SPDR has long been among the best ETFs to buy, from a sector standpoint, during corrections and bear markets. For instance, during 2007-09, while the S&P 500 was shedding more than 55%, the XLP only lost half as much, -28.5%. In 2015, the XLP outperformed the index 7% to 1.3%. And this year, the fund has an 11-percentage-point edge over the broader market.
An above-average yield of 2.3% is partly responsible for that outperformance.
Vanguard Short-Term Bond ETF
- Type: Short-term bond
- Assets under management: $39.7 billion
- SEC yield: 2.9%*
- Expenses: 0.04%
In many market selloffs, investors can be found fleeing into the relative safety of bonds. Sure, bonds' all-time returns don't come close to stocks, but they're typically more stable. And in a volatile market, investors cherish knowing their money will be returned with a little interest on top.
Thing is, when the stock market is getting shelled in large part because interest rates are going up (and, conversely, bond prices are going down), bonds aren't much of a safe haven.
"Rising rates and slowing growth are not a supportive environment for investors, so it is unlikely that equity or fixed income returns will match the stimulus-fueled returns of the past two years," says Gargi Chaudhuri, head of iShares Investment Strategy, Americas. "In a climate of lower, more volatile returns, investors should instead focus on relative returns within asset classes. We see opportunity in shorter-dated fixed income in both Treasuries and credit given the hawkish Fed."
Why short-term? The less time a bond has remaining before it matures, the likelier it is that the bond will be repaid – thus, it's less risky. Also, the value of the bonds themselves tend to be much more stable than stocks. The trade-off, of course, is that these bonds don't yield much.
The Vanguard Short-Term Bond ETF (BSV, $76.47) is a dirt-cheap index ETF that gets you exposure to an enormous world of nearly 2,500 short-term bonds with maturities of between one and five years.
In addition to a short-term bent, BSV also invests only in investment-grade debt, further tamping down on risk. Roughly two-thirds of the fund is invested in U.S. Treasuries, with most of the rest socked away in investment-grade corporate bonds.
And yet, despite the relative safety of these bonds, you can still squeeze nearly 3% in yield out of Vanguard Short-Term Bond.
Just remember: Stability works both ways. BSV doesn't move much, in bull and bear markets. It's merely a place to duck for cover and earn a little bit of interest while you wait for bluer skies.
* SEC yield reflects the interest earned for the most recent 30-day period after deducting fund expenses. SEC yield is a standard measure for bond funds.
GraniteShares Gold Trust
- Type: Commodity (Gold)
- Assets under management: $1.0 billion
- Dividend yield: N/A
- Expenses: 0.1749%
Commodities are another popular flight-to-safety play, though perhaps no physical metal is more well-thought-of during a panic than gold.
A lot of that is a fear of a horrible-case scenario: If the world's economies collapse and paper money means nothing, humans need something to use for transactions, and many believe that something will be the shiny yellow element that we used as currency for thousands of years.
Of course, at that point, your IRA will be the least of your worries.
But there is a case for gold as a hedge. It's an "uncorrelated" asset, which means it doesn't move perfectly with or against the stock market. It's also a hedge against inflation, often going up when central banks unleash easy-money policies. Because gold itself is priced in dollars, weakness in the U.S. dollar can make it worth more. So sometimes, it pays to have a small allocation to gold.
You could buy physical gold. You could find someone selling gold bars or coins. You could pay to have them delivered. You could find somewhere to store them. You could insure them. And when it's time to exit your investment, you could go to the trouble of finding a buyer of all your physical loot.
If that sounds exhausting, consider one of the many funds that trade based on the worth of actual gold stored in vaults.
The GraniteShares Gold Trust (BAR, $18.56) is one of the best ETFs for this purpose. Each ETF unit represents 1/100th of an ounce of gold. And with a 0.1749% expense ratio, it's the second-cheapest ETF that's backed by physical gold. Traders also like BAR because of its low spread, and its investment team is easier to access than those at large providers.
VanEck Vectors Gold Miners ETF
- Type: Industry (Gold mining)
- Assets under management: $12.7 billion
- Dividend yield: 1.7%
- Expenses: 0.51%
There's another way to invest in gold, and that's by purchasing stocks of the companies that actually dig up the metal. While these are publicly traded firms that bring in revenues and report quarterly financials like any other company, their stocks are largely dictated by gold's behavior, not what the rest of the market is doing around them.
Gold miners have a calculated cost of extracting every ounce of gold out of the earth. Every dollar above that pads their profits. Thus, the same pressures that push gold higher and pull it lower will have a similar effect on gold mining stocks.
The VanEck Vectors Gold Miners ETF (GDX, $32.57) is among the best ETFs for this purpose. It's the largest, too, at nearly $13 billion in assets.
GDX holds 56 stocks engaged in the actual extraction and selling of gold. (VanEck has a sister fund, GDXJ, that invests in the "junior" gold miners that hunt for new deposits.) That said, the cap-weighted nature of the ETF means that the largest gold miners have an outsize say in how the fund performs. Newmont (NEM) makes up 16% of assets, while Barrick Gold (GOLD) is another 11%.
But why buy gold miners when you could just buy gold? Well, gold mining stocks sometimes move in a more exaggerated manner – as in, when gold goes up, gold miners go up by even more. For instance, during the first quarter of 2022 while GDX shot 23% higher. (Just be warned: This dynamic goes both ways.)
Simplify Interest Rate Hedge
- Type: Bond hedge
- Assets under management: $294.4 million
- Dividend yield: 0.02%
- Expenses: 0.50%
Rising interest rates have been one of the top stories of 2022. The Federal Reserve, as expected, hiked its Fed funds rate by 25 basis points in March, then another 50 basis points in May. (A basis point is one one-hundredth of a percentage point.)
And more – much more – is likely on the way.
"The market is now expecting nine to 10 interest rate hikes between now and early 2023," Invesco Global Market Strategist Brian Levitt said ahead of the Fed's June policy meeting, adding that "50-basis-point hikes are priced in at the next three Federal Open Market Committee (FOMC) meetings."
The Simplify Interest Rate Hedge (PFIX, $57.88) has been one of 2022's best ETFs as a result of all this upward rate pressure. That's because it holds a large position in interest-rate options that provide "direct and transparent convex exposure to large upward moves in interest rates and interest rate volatility."
In short, as interest rates rise, PFIX is designed to rise along with it. And rise it has. The fund has shot more than 40% higher so far in 2022.
"PFIX effectively offers financial managers access to a six-year put option on 30-year bonds – a product previously available only to professionals," says Harley Bassman, managing partner with Simplify.
But if you do try to leverage this actively managed ETF for more gains, keep a watchful eye – any dovish changes to expectations for future rate hikes could yank PFIX lower in a hurry.
ProShares Short S&P500 ETF
- Type: Inverse stock
- Assets under management: $2.8 billion
- Dividend yield: 0.0%
- Expenses: 0.88%
Many of the bear-market ETFs we've talked about so far seem likely to lose less than the market during a downturn, and some might even generate positive returns.
But the ProShares Short S&P500 ETF (SH, $16.09) is effectively guaranteed to do well if the market crashes and burns.
The ProShares Short S&P500 ETF is a complex machine of swaps and other derivatives (financial instruments that reflect the value of underlying assets) that produces the inverse daily return (minus fees) of the S&P 500 Index. Or, put simply, if the S&P 500 goes up 1%, SH will go down 1%, and vice versa. If you look at the chart of this ETF versus the index, you'll see a virtual mirror image.
This is one of the simplest market hedges you'll find.
Chances are you own a lot of stocks you believe in for the long term, and if you've held them a while, you're probably sitting on some great dividend yields on your original purchase price. Now, if you think the market will keep going south for a prolonged period of time, you could dump those stocks, lose your attractive yield on cost, pay taxes on your capital gains, and hope to time the market right and buy back in at a lower cost.
Or … you could just hang on to those stocks, buy some SH to offset some short-term losses in your portfolio, then sell it when you think the recovery is about to get under way.
There's a very clear risk, of course: If the market goes up, SH will nullify some of your gains.
Yes, there are much more aggressive "leveraged" inverse ETFs that provide double or even triple this kind of exposure, whether it's to the S&P 500, market sectors or even specific industries. But those are far too risky for buy-and-hold investors. On the other hand, a small hedging position in SH is manageable and won't crack your portfolio wide open if stocks manage to fend off the bears.
AdvisorShares Ranger Equity Bear ETF
- Type: Inverse stock
- Assets under management: $142.9 million
- Dividend yield: 0.0%
- Expenses: 5.2%
Another way to peel this particular banana is an actively managed short-selling fund that has been around for a little more than a decade.
The AdvisorShares Ranger Equity Bear ETF (HDGE, $30.34), which hit the market in 2011, relies on fundamental research to determine which stocks it should bet against.
Managers John Del Vecchio and Brad Lamensdorf attempt to identify companies with "low earnings quality or aggressive accounting which may be intended on the part of company management to mask operational deterioration and bolster the reported earnings per share over a short time period." They also try to identify shorter-term downward catalysts, such as a company missing earnings expectations or reducing its financial forecasts.
Because the managers operate on a stock-by-stock basis, the makeup will change over time. Right now, the pair are most bearish on small caps (46%), then mid-caps (36%), and the rest of their positions are in large caps (18%). They're particularly bearish on technology stocks at the moment, with sector names such as Autodesk (ADSK) and Cloudflare (NET) making up 39% of their short bets.
So far in 2022, the edge goes to the actively managed HDGE, which is up 23% versus 18% for the passive SH.
ProShares Decline of the Retail Store ETF
- Type: Inverse equity (retail)
- Assets under management: $10.0 million
- Dividend yield: 0.0%
- Expenses: 0.65%
One last way to directly bet against the market is the ProShares Decline of the Retail Store ETF (EMTY, $16.30), which is narrower in scope than SH and HDGE.
The Decline of the Retail Store ETF is, as inverse plays go, much longer-term in scope. The fund provides inverse daily exposure to the Solactive-ProShares Bricks and Mortar Retail Store Index – a collection of primarily physical retailers. The idea here is that if you believe e-commerce will continue to grow as it has, some of that growth likely will come at the expenses of brick-and-mortar operators.
That's a dynamic that has been playing out for years, and could play out for many years to come.
But given that one of the underlying fears behind this market downturn is the possibility of an eventual recession, there's reason to think that EMTY could be a useful tool for playing defense in the short term.
While EMTY does bet against food retailers (17%) such as Kroger (KR) that sell basic staples and thus should be more durable in a recession, it largely goes short specialty (24%), general merchandise (14%) and apparel (12%) retailers that rely much more on discretionary spend that could dry up in the coming months. Think stocks such as Dillard's (DDS) and Academy Sports and Outdoors (ASO).
So far in 2022, this strategy has been good for a 14% gain.
Kyle Woodley was long XLU as of this writing.