3 ETFs You Must Own During a Weak Market

The stock market is a fickle beast. Driven by perception rather than reality, it can launch into a multi-day rally at the smallest bullish rumor, or plunge lower whenever a tiny bit of economic uncertainty arises. 

Everyone has a different opinion of what the future holds for the stock market. But lately, the bearish specialists have been presenting a compelling case of why a market downturn is way overdue.#-ad_banner-#

Because the market acts as an anticipatory mechanism, all the pending good news and potential government stimulus have already been priced into the market, according to these bears. In other words, the market has already moved higher on the anticipation of all possible bullish news. 

Another strong point they make is that many companies have only been able to achieve improved earnings by cutting costs, not revenue. This type of creative accounting only offers a short-term fix for their balance sheet. A company can only prop up results through cost-cutting strategies for so long until there is nothing left to cut and the truth is revealed. In this case, the truth is the still-weak economy. To make matters worse, if Congress doesn’t come up with a solution for the fiscal cliff dilemma, then tax increases will negatively affect corporate profits.

Although these dire prospects can be frightening, remember: The cool thing about the stock market is that savvy investors can profit regardless of which way it turns.

And if the market turns toward the bearish direction as it’s so widely believed these days, then I have three under-the-radar investments that make perfect sense to own. Here they are…

1. UBS ETRACS Fisher-Gartman Risk Off ETN (NYSE: OFF)
The term “risk-off” has come into vogue in investment circles. It means avoiding or shorting so-called risky assets such as emerging-market stocks and buying traditionally safe assets such as the Swiss franc or U.S. Treasuries. This exchange-traded note (ETN) allows you to take a position in “risk-off” assets in one single investment. 

Prior to this ETN, investors had to build their own portfolio across various asset classes to accomplish the same goal. The ETN inversely tracks the Fisher-Gartman Risk Index. This index consists of a mixture of long and short positions in a variety of asset classes that are designed to rise in bullish environments and fall in bearish environments. In other words, OFF is designed to do the opposite of the Fisher Gartman Index. This ETN should particularly offer solid performance during market corrections.

You can see the inverse relationship with the S&P 500 in this chart:

2. QuantShares U.S. Market Anti Beta Fund (NYSE: BTAL)
Beta is a measure of volatility in the stock market — as the stock market goes down, volatility goes up. This “anti-volatility” exchange-traded fund (ETF) tracks the Dow Jones U.S. Thematic Market Neutral Anti- Beta Index. The index is rebalanced monthly by taking long positions in the lowest beta stocks and shorting the highest beta stocks in equal portions, within each sector. 

These trades provide the investor with the spread return between low- and high-beta stocks. This means the returns are based on the differences in the rates of return between the long positions and short positions. Take a look at the chart below to see the relationship between this ETF and the S&P 500. 

3. FactorShares 2X Gold Bull/S&P 500 Bear (NYSE: FSG)
This ETF does exactly what its name suggests. It follows the difference in daily returns between the price of gold and equities by having a double leveraged long position in gold, as well as a double leveraged short position in U.S. stocks. The idea is to provide investors with the spread between gold and equities with a leveraged product. It is designed for those who think there will be a migration from stocks to gold during times of economic uncertainty. 

It’s critical to remember that this is a leveraged product, therefore not suitable as a long-term investment. The ETF is designed for day trading or very short-term holding periods. It tracks the daily spread between equities and gold, not necessarily the longer-term movement due to rebalancing. You can see this fact on the chart.

If you’re a more experienced investor and believe there will be a shift out of stocks into gold, then this ETF is a good a choice.

Risks to Consider: Out of the three ETFs, FSG poses the highest inherent risk due to the leverage, rebalancing and short-term time frame. In fact, it’s possible that this ETF will move in opposite direction than expected over time. It is only suitable for nimble day traders who like to time short-term stock/commodity movements. Always use stops and position size properly when investing.

Action to Take — > No one really knows for certain what the future holds. Markets will rally and markets will crash eventually. But if you strongly agree with the stock market’s bearish camp, then these three under-the-radar ETFs deserve a closer look and even a position in your portfolio.