Granted, I am being a tad bit facetious with my commentary. I do not subscribe to the notion that one can predict when a genuine crash will occur. Nevertheless, I acknowledge that there is no shortage of reasons to be wary. Institutional investors have been selling into August strength, Federal Reserve tapering uncertainty is serving to slow more than the rate of bond purchases and we’re once again bumping up against another debt ceiling debate.
For many of my client portfolios, we are maintaining a commitment to funds like SPDR Select Health Care (XLV), PowerShares Pharmaceuticals (PJP) and iShares DJ Aerospace and Defense (ITA). These ETFs have enviable defensive attributes where performance does not rely on an interest rate addiction nor economic cycles. They are hardly immune to sell-offs, pullbacks and crashes, but they do have staying power. (I’d consider buying more in a downturn.)
While I expect September to be weak for stocks due to a wide variety of economic, political and fundamental headwinds, those who believe a stock crash is imminent might consider one or more “reversal ETFs.” Specifically, the yen via CurrencyShares Yen Trust (FXY) could strengthen in a reversal of the carry trade, volatility via iPath S&P 500 VIX Short-Term (VXX) could rocket in a reversal of the complacency trend and extended duration Treasuries via Vanguard Extended Duration (EDV) could surge on a reversal of the “rates-can-only-go-up” thinking.
Gary Gordon is president of Pacific Park Financial, Inc.