As a market pullback goes underway, investors can include equity exchange traded funds that focus on a bearish investment strategy to help hedge against further weakness.
For example, the AdvisorShares Ranger Equity Bear ETF (NYSEArca: HDGE), which is subadvised by Ranger Alternative Management, selects short positions based on fundamentals, such as low earnings or aggressive accounting, as a way to target some of least financially sound companies in the U.S.
Additionally, the AdvisorShares Athena International Bear ETF (NYSEArca: HDGI), which is subadvised by AthenaInvest Advisors, provides investors with a hedged international play. The fund tries to generate capital appreciation through short sales of international equities. The managers essentially utilize behavioral financing to identify some of the worst stocks in the global market to short.
Over the past month, HDGE is up 3.0% while HDGI gained 1.7%. In comparison, the S&P 500 is down 1.4%.
Stock observers are warning about bearish market signals, including excessive bullish enthusiasm, overvaluation based on price-to-earnings and extreme divergences in market sectors, the Wall Street Journal reports.
Hayes Martin, president of Market Extremes, points out that no bear market has occurred without these three signals.
Since December, the percentage of advisors who described themselves as bullish rose above 60%, which Investors Intelligence considers “danger territory.” Meanwhile, the P/E ratio for the Russell 2000 index hit its highest level since the benchmark was created . Martin warned that the third signal emerged late July.
Nevertheless, Martin believes that the pullback this time around may be muted as the Federal Reserve will quickly “step in to provide extreme liquidity to blunt the decline.”
Another credible pullback play is the PowerShares S&P 500 Downside Hedged Portfolio (NYSEArca: PHDG). PHDG tries to generate a positive total return in both rising and falling markets. PHDG holds derivatives along with equities to achieve its target objective. The ETF is up 0.1% over the past month and has gained 2.3% year-to-date.
PHDG tracks the the S&P 500 Dynamic VEQTOR Index holds derivatives along with equities with the bulk of the ETF’s long equity exposure going to U.S. large-caps.
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Max Chen contributed to this article.