Stocks suffered through their worst day of 2017 Tuesday with the S&P 500 sliding 1.2 percent. One day doesn't always result in a new trend, but investors should always be prepared.
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Exchange traded funds offer investors myriad avenues with which to prepare for equity market retrenchments.
Here are some ideas from the world of ETFs for investors looking to hedge against a possible correction in stocks.
Direxion Daily S&P 500Bear 1x Shares (SPDN)
Leveraged ETFs are often viewed as one of the best ways to profit when stocks decline and there are plenty of leveraged ETFs tracking widely followed U.S. equity benchmarks, such as the S&P 500. However, leveraged ETF are volatile instruments, intended for use only by active, risk-tolerant, sophisticated traders over intraday time frames.
The Direxion Daily S&P 500 Bear 1x Shares is an inverse though not leveraged ETF. Like leveraged ETFs, inverse ETFs are intended to be short-term trading vehicles, not investments, but SPDN does represent a more conservative avenue for profiting from a possible decline in the S&P 500. If SPDN behaves as expected, it will rise 1 percent on a day when the S&P 500 declines by the same amount.
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SPDR Gold Shares (GLD)
Gold is a favored destination for investors to guard against equity market corrections, a thesis largely based on historical data indicating the yellow metal isn't highly correlated to bonds and stocks.
The current environment brings an interesting confluence of factors, including the dichotomy of rising interest rates and a lethargic U.S. dollar. Rising rates are usually seen as a drag on gold because bullion offers no yield, but a weak dollar is a boost because gold is denominated in dollars.
Gold is more attractive when interest rates because there's no yield as there's on a bond fund, meaning capital appreciation is the only way investors in these products are compensated for taking on gold market risk. On the other hand, data suggests inflation is rising, which could bode well for gold ETFs because the yellow metal is often embraced as an inflation hedge.
Investors added $377.1 million to GLD this year.
ProShares Short QQQ (PSQ)
The Nasdaq Composite slid 1.8 percent Tuesday. Again, that is just one day, but investors looking to hedge against further Nasdaq declines without employing leverage can turn to the ProShares Short QQQ.
PSQ seeks a return that is -1x the return of an index or other benchmark (target) for a single day, as measured from one NAV calculation to the next. Due to the compounding of daily returns, ProShares' returns over periods other than one day will likely differ in amount and possibly direction from the target return for the same period, according to ProShares.
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