We’re approaching the 10-year anniversary of the Lehman Brothers bankruptcy, which opened the floodgates for the financial meltdown that followed during the subsequent six months.
While the factors behind the perfect storm of 2008-2009 are unlikely to align this time around, fresh storm clouds are appearing on the horizon. Nuveen Asset Management’s Robert Doll, for example, cited several factors that could spell the end of the current, historically long bull market: a sooner-than-expected recession; problems posed by rising trade barriers; and a slowdown in corporate profit growth.
And there are two more market headwinds to ponder. First, the Federal Reserve will likely raise rates twice more this year, with possibly more to come after that. And emerging markets are now in bear market territory, raising concerns of a spreading contagion.
That’s why some investors are once again starting to prepare for the eventual and inevitable bear market. While many investors will play defense with a simple approach such as put options on the S&P 500 Index, some ETFs offer more proactive ways to profit from a market pullback.
Cheaper Than 2-and-20
With roughly $130 million in assets and a seven-year track record, the AdvisorShares Ranger Equity Bear ETF (HDGE) is the seasoned veteran of the current crop of bear-tilting ETFs. The fund seeks short-sale candidates by focusing on companies that have dubious earnings quality, use aggressive accounting techniques or appear vulnerable to negative catalysts such as an earnings shortfall. In effect, this ETF is more like a hedge fund.
That notion is backed up by an eye-popping 2.86 percent expense ratio. Noah Hamman, CEO of AdvisorShares, says the ETF’s costs are in line with other actively-managed products. Indeed, when successful, this fund is built to be a better bargain than hedge funds, which often charge a two percent commission and a 20 percent take of any profits. Hamman adds that the ETF approach is much more transparent than hedge funds by providing a daily window into the fund's holdings.
The high fees are partially due to the unusually intense level of oversight the portfolio requires. “When you’re short selling, you need to stay on top of the holdings and be able to react quickly to news,” says Hamman. Roughly one-third of the fund’s expenses are attributed to the short interest expense—i.e. the cost to borrow to short stocks in the underlying portfolio. It is axiomatic to note that this ETF has delivered negative returns throughout the current bull market.
Getting Technical
AdvisorShares in July launched a second bear fund, this time in tandem with Nasdaq Dorsey Wright. That firm has built a strong following among advisors and investors with its focus on a relative strength index (RSI) technical approach. The new AdvisorShares Dorsey Wright Short ETF (DWSH) flips the RSI angle by shorting stocks that show signs of relative weakness. “It’s the same systematic and disciplined process that Dorsey Wright is known for, yet turned on its head,” says Hamman.