Navigating Bear Markets: Investing with ETFs

Investing in a bear ETF, or one that is based on a downturn in the market, may be a good strategy if the prospects for the stock market are low. A bear market ETF provides a way for an investor to benefit from the low expectation of the market's performance and provide some investment return for the owner of the contract.

Exchange Traded Funds

Exchange traded funds mirror their index performance by matching the investments that make up the index. In the case of a bear market ETF, the performance is based on derivatives and other securities that are predicting a prolonged downturn in the overall market.

ETFs are similar to mutual funds, but vary slightly. Whereas a mutual fund is actively managed and seeks to outperform the general market, an ETF seeks to perform in the same way as the underlying index that it is tracking. This means that an ETF is passively managed and should have a fee structure that is lower than that of a comparable mutual fund. As with any type of investment, ETFs is subject to the risk of loss.

Market Condition for Bear ETFs

If you believe the general outlook that the market will go down for a prolonged period of time, at least 2 to 3 quarters, investing in a bear ETF makes sense. Investing in a bear ETF when the market is experiencing an upswing or general rise however is not a good idea since the return in the bear ETF will be much lower than what you would find in a corresponding bull ETF.  

When hedging bets about the direction of the market, which is hard to predict over a sustained period of time, you need to put in the time and research to justify taking this type of approach. Be careful to always take the time to research your information and use many different sources of information before you make a decision.

The Suitability of Bear ETFs

Bear ETFs represent a risky investment strategy that is best left to those individuals with greater investment experience. If you purchase ETFs without the assistance of a broker or investment counselor, you will be subject to greater losses and no recourse in the event that your hedge is on the wrong side of the market. Be certain to carefully examine your investment strategy and goals because a bear ETF may not help your overall portfolio. You should really know what you are doing before you invest in this type of fund.

Further Research on Bear ETFs 

It is a good idea to research information on the NASDAQ trading system. Particularly, you should read through all information that pertains to the construction of these investments and how the bear ETFs work, relative to various conditions in the market. This information will be found in the prospectus for the fund and will be of value to you as you make a decision to purchase or not purchase a bear ETF.