No one wants to lose money in the stock market. And day after day after day of declines can be downright frightening. So it’s almost counterintuitive to think about a “best” bear market ETF. How does something lie that even exist? Wouldn’t it be smart to just pull your money out of the market in this situation?
Well, somewhere along the line, someone figured out how to profit during these market declines. Not just with individual stocks, either, but with ETFs. And the best bear market ETF can make you a handsome profit.
Understanding a bear market for better investing
The price of securities fluctuate. That’s just a fact of investing. However, a “bear market” defines a downward movement in the stock market which leads to a fall in security prices of at least 20%.
Beyond the declines, bear markets typically come with pessimism from investors, especially if the entire market is in decline and not just an index. Investors consider the decline and believe it will continue, ultimately leading to greater drops and instability within the market. Some investors take their money out of stocks during a bear market and put that money into more secure investments, often targeting fixed-income securities. Individual securities can have their own bear market if the price drops by at least 20% and remains that way for at least two months.
Bear markets are not necessarily indicative of an imminent recession, but they do often come with economic decline or recessions. They can last a few months or a few years. According to Hartford Funds, the average bear market is about 9.6 months long and occurs, on average, once every 3.6 years. Although, there have been fewer bear markets since World War II than before it.
The declines from a bear market can be troubling to investors, but there are ways to invest to guard against bear market losses.
Finding the best bear market ETF
If you want to find the best bear market ETF, look for inverse ETFs. Inverse ETFs operate differently from traditional ETFs. These ETFs are developed to make money when the underlying stock or index it tracks goes down in price. The interesting part of investing in inverse ETFs is that you don’t have to sell this security once a bear market begins. In fact, it is best to continue holding the inverse ETF in this kind of situation. This is different from other investing strategies used during bear markets like short selling or putting money into fixed-income securities, because the goal of the inverse ETF is to watch the underlying price go down.
If an inverse ETF sounds tricky and isn’t the best bear market ETF for you, consider an ETF that focuses on defensive stocks. Not to be confused with defense stocks, defensive stocks come from well-established companies that provide consumer staples like soap or food. These consumer products are necessary resources, regardless of the market’s current state. Many of these top companies have a historical record of profits and paying dividends, making it even easier to put money behind them during times of pessimism.
It’s important to realize that both bear and bull markets will impact your investments in various ways. Some investors prepare their portfolios with defensive stocks, high-quality blue chip stocks with a history of dividend payments, or inverse ETFs to guard against market volatility and downturns. Whether you prefer that strategic approach, or would rather turn to short selling and fixed-income investments during a bear market is up to you. However, it is good to know your options for the best bear market ETF if you need to plan accordingly.
How do you change your investing strategy during a bear market?