7 ETFs to Trade Like a Hedge Fund
Hedge your investments with these ETFs.
The stock market is on a tear in 2017, with the Standard & Poor's 500 index sitting on roughly 14 percent gains. If this pace keeps up, we could log the best year for stocks since 2013, when the market gained more than 30 percent in the calendar year. But while 2013 was characterized by euphoria, it's safe to say that many investors are viewing the current rally in 2017 with a bit more trepidation. The bull market is pushing 9 years old, and most indicators seem to hint that momentum is weak for the global economy. That means now may be the perfect time for a hedge.
What is hedging?
Derived from the centuries-old idea of planting a hedge around your lands as a natural barrier, "hedging" in investing implies an unconventional strategy that can provide returns uncorrelated to the broader stock market. Hedge funds are investment firms that expressly use tactics to generate big profits even in a troubled market. Traditional hedge funds typically demand big lump sum investments, and charge exorbitant fees that small investors can't afford. But in the age of exchange-traded funds, there is an emerging group of funds that help regular investors replicate the strategy of a hedge fund -- without the red tape or steep costs. Here are seven:
Multi-Strategy ETF (ticker: QAI)
The QAI is a one-stop shop for someone who wants to invest a modest amount of money and try to replicate a hedge fund strategy. The fund employs both long and short exposure to stocks, exposure to emerging markets, event-driven investments and other sophisticated strategies that many small-time investors may not feel comfortable with on their own. Much like a hedge fund, you're putting your money in the hands of a well-heeled manager and trusting his judgment to follow any and all trends that could generate a profit.
Expenses: 0.98 percent, or $98 annually per $10,000 invested.
Proshares Hedge Replication ETF (HDG)
Another sophisticated fund is the HDG, which deploys tactics that many investors wouldn't be able to access on their own. The fund is benchmarked to a Merrill Lynch index that monitors a group of the world's largest and most successful hedge funds, and attempts to replicate their strategies and successes. Specifically, HDG hand-picks individual stocks that it thinks will rise and bets against investments it doesn't like -- including emerging market equities and even currencies. The fund, like others on this list, hasn't done well in 2017 because of the broad-based stock rally that has dwarfed everything else. But if you're looking for insurance or diversification, this fund is worth a look.
Expenses: 0.95 percent
ProShares Short Dow30 (DOG)
The Dow Jones industrial average is one of the most popular ways to "buy the market." So it makes sense that playing the downside on the Dow is the easiest way to hedge against a broad market reversal. That's exactly what the DOG is designed to do. This ETF seeks to generate the opposite of the Dow's daily performance, before fees and expenses are tacked on. That may not result in the exact opposite long-term performance of the benchmark, but it's very close. The danger, of course, is knowing when to bet against the Dow.
Expenses: 0.95 percent
ProShares Short MSCI Emerging Markets ETF (EUM)
If you'd prefer to bet against international markets instead of betting against America, then consider the EUM. This fund has a similar strategy, but generates the opposite return of the global MSCI Emerging Markets index. To be clear, this isn't a global fund that is equally balanced across Western nations like Germany or Australia. It is a purely emerging-markets fund with big weightings toward China, Taiwan, India and South Korea among others. But if you think the more stable economies of the world are safe but trouble is most likely in these more aggressive regions, the EUM fund is a great hedge against volatility and possible global declines.
Expenses: 0.95 percent
AdvisorShares Active Bear ETF (HDGE)
What if you don't think it's as simple as shorting the market at large, and instead prefer a human hand that selects stocks looking the worst right now? That's where the HDGE comes in. Because it's more actively managed, the HDGE fund is no different than any other fund that's trying to beat the market. It just so happens that the strategy is to short domestic companies it thinks are weak, instead of going long on companies it thinks are strong. HDGE is down significantly this year -- it's hard to be playing the downside of a bull market even if you're hand-picking the worst of the worst.
Expenses: 1.75 percent
Cambria Tail Risk ETF (TAIL)
Cambria Investments created TAIL to provide a kind of insurance for your portfolio. The ETF is heavily invested in stable U.S. Treasury bonds, which are the safest investment on the planet, and supplements the portfolio with "put" option contracts to offset any stock declines. Put options give the seller the option to sell a security at a given price. So the TAIL is constantly reserving the right to sell its investments at a fixed price just in case the market collapses and the new prices wind up being much, much lower.
Expenses: 0.59 percent
First Trust Long/Short Equity ETF (FTLS)
Another ETF that trades with a unique investment angle is the FTLS. The fund is actively managed and very is tactical about which stocks to bet on and which to bet against. The idea is simple: Buy the good stocks you like to play the upside, and bet against the bad stocks you hate to profit from their decline. That allows managers to follow the opportunities, instead of being locked into buying stocks even when the market is troubled or shorting stocks even when the market is roaring higher.
Expenses: 0.96 percent
Jeff Reeves is currently executive editor of InvestorPlace.com. He is a stock analyst and financial commentator with almost two decades of newsroom and markets experience, contributing to The Wall Street Journal network, USA Today, CNBC, TheStreet.com, Fox Business Channel and US News. Follow him on Twitter @JeffReevesIP.
