Best ETFs For Downside Protection

February 12, 2016

It’s been a wild ride so far this year for U.S. stocks. Since the beginning of 2016, the S&P 500 has already declined some 10% in a loss that has been anything but smooth or linear.

The uptick in volatility and the poor stock market performance have many investors now more concerned with downside protection than with upside gains. We asked a handful of ETF strategists what ETFs they turn to when downside protection is what they are trying to achieve. Here’s what they had to say:

Michael Venuto, chief investment officer, New York-based Toroso Investments

Toroso manages portfolios based on three outcomes: growth, income and wealth preservation. With the recent market sell-off and volatility, investors have turned their attention to wealth preservation.

Our core wealth preservation strategy seeks to enhance the Harry Browne Permanent Portfolio through ETF security selection. A basic permanent portfolio equal-weights equities (the Vanguard Total Stock Market (VTI | A-100)), bonds (the iShares Core U.S. Aggregate Bond (AGG | A-98)), gold (the SPDR Gold Trust (GLD | A-100)) and cash (the iShares 1-3 Year Treasury Bond (SHY | A-97)).

Over the past 40 years, this concept has produced annualized returns of around 7-8%, with a third of the volatility of the S&P 500. However, over the past few years, the bull market in growth stocks and the bear market in gold have caused this allocation to produce lackluster returns.

In 2016, the strategy appears to be working again. Global X Funds offers an ETF that seeks to express the Harry Browne concept, and it’s up for the year so far: the Global X Permanent ETF (PERM).

I believe in a more rational market that’s not propped up by federal stimulus. In this market, the Permanent allocation and PERM ETF should produce returns more consistent with historical norms.

Another ETF we use to protect client assets is the QuantShares U.S. Market Neutral Anti-Beta (BTAL |F-38). This ETF shorts high-beta names in the S&P 500 while be long low-beta names. It’s worked well in this environment as a tail hedge, and is up more than 13% YTD.

Wesley Gray, CEO and CIO, Broomall, Pennsylvania-based Alpha Architect

Our robo advisor is the only robo out there that does asset allocation with downside protection.

Our approach is to own the best-of-breed for each asset allocation line, and then use trends to buy/sell outside of the ETF structure.

If you want the downside protection within an ETF, Meb Faber’s Cambria Value and Momentum ETF (VAMO) has trend-following on it. The Pacer lineup [including the Pacer Trendpilot 750 (PTLC), the Pacer Trendpilot 450 (PTMC) and the Pacer Trendpilot 100 (PTNQ)] has trend-following. The AlphaClone funds [such as the AlphaClone Alternative Alpha ETF (ALFA | C-35)] also have trend-following rules.

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