5 Effective ETFs to Hedge a Frothy Stock Market

5 Effective ETFs to Hedge a Frothy Stock MarketIn the minds of many, our stock market is a bit bloated at its current levels. Despite weak fundamentals, major benchmarks are near pre-recession levels which is more than likely the result of multiple rounds of QE artificially boosting the economy. Pre-recession, GDP growth was at about 3.6% at the end of 2007, while unemployment sat around 4.6%. Now, GDP growth is at 1.7% (revised) with unemployment staying comfortable above 8% (if you need more stats, there’s plenty where that came from). Stocks have surged since the recession, but the fundamentals of our economy have only marginally improved [for more economic news and analysis subscribe to our free newsletter].

You could almost say that the only thing QE benefits is the stock market, creating a false sense of security for investors everywhere. Expert analysts have been predicting bone-crushing recessions on the horizon, as they feel that the QE crutch will eventually be removed and bottom out stocks. For those who believe that our current stock market is a bit overvalued, we outline five ETFs to hedge against a possible fallout or economic downturn.

PowerShares DB Agriculture Fund (NYSEARCA:DBA)

This ETF holds futures contracts for some of the most popular and liquid agricultural commodities. Currently, the fund grants the most exposure to corn, soybeans, and sugar, but others like cotton and coffee still get a fair representation. The attraction to DBA comes from the fact that food prices will always keep up with inflation, as they are often the first sign of such an environment in the first place. For the most part, food demand is inelastic whether we are in a recession or not, allowing this product the potential to perform well even in times of economic turmoil. In 2008 when the S&P 500 lost nearly 36%, DBA was down just 19% by comparison.

SPDR Gold Trust (NYSEARCA:GLD)

A no-brainer. Gold is the ultimate hedge against falling stock markets as it not only has all of the benefits of a standard commodity, but investors tend to flock towards metals given the safe haven appeal. GLD has nearly $75 billion in total assets, making it the second largest ETF in the world. The fund offers exposure to physical gold at a cost of 40 basis points, but there has been quite a controversy as to whether or not the fund actually holds the gold it claims to. The decision on whether or not to trust GLD is up to you, but it should be noted that the fund has never turned in a losing year since its inception [see also Three Reasons Why Gold Is Overvalued].

iShares Silver Trust (NYSEARCA:SLV)

Another physically-backed fund, SLV is the most popular fund for obtaining exposure to silver. Investors should be aware that silver has a tendency to be more volatile that gold which can be good or bad depending on the year. If it is any consolation, investing legend Jim Rogers recently touted silver as a better investment than its precious metal counterpart stating that he feels this white metal has more upside than gold. To give you a quick idea of how hot and cold this fund can be, SLV lost 23% in 2008, only to jump by nearly 130% over the next two years.

United States Commodity Index Fund ETV (NYSEARCA:USCI)

Contango is an inevitable phenomenon in the commodity world and many spend their efforts trying to avoid it. This fund has been dubbed the “contango killer” as it focuses its efforts on investing in 14 different commodity futures while trying to avoid falling prey to an upward sloping curve. USCI features a dynamic basket of holdings that changes on a monthly basis based on observable price signals. It screens out commodities that show the most significant backwardation or moderate contango. USCI ensures diversification by allocating assets to each of the six commodity sectors (grains, softs, industrial metals, precious metals, agriculture and livestock) each and every month. Avoiding contango and investing in the broad commodities space can ensure you keep up with inflation while not giving up gains to a less-than-ideal futures curve [see also What Is Contango?].

iPath S&P 500 VIX Short Term Futures TM ETN (NYSEARCA:VXX)

Volatility has become one of the most popular asset classes after the widespread introduction of ETNs that invested in their futures. VXX alone trades more than 44 million times each day and is one of the most popular speculative tools on the market. Obviously this fund is extremely dangerous to hold in the long-term, but when hedging against a fall-out in the near future, few funds will be able to outperform VXX. The fund has never finished a year in the green, yet another reason to never hold it long-term, but when markets hit a speed bump like they did last August, this fund soars to unthinkable heights. For those who can stomach the hefty movements of VXX, make sure you keep a watchful eye on a daily basis as it can turn sour on a dime.

This article was originally written by Jared Cummans, and posted on CommodityHQ.

blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

10 High Margin Food Products to Build a Business Around

The 10 Most Expensive Clothing Stores in the United States to Get Decked Out At

The 5 Biggest Kickstarter Scams That Swindled Backers’ Donations

The 10 Most Expensive Boarding Schools In the World

50 Crazy Facts About Japan You Won’t Believe

Top 10 Least Expensive Hybrid Cars to Save the Planet With

The 10 Biggest ‘Gate’ Controversies in History

The 10 States with the Highest Nursing Shortages Leaving Their Hospitals Depleted

The 10 Best Value Investment Blogs that Every Investor Must Read

The 6 Cheapest Boarding Schools in Europe 2015

The 5 Most Expensive Cars To Insure in the World

The 10 Most Common Genetically Modified Foods

10 Self-Made Billionaires Who Came From Nothing

The 10 Most Expensive Cities to Live in North America

The 13 Most Expensive Headphones in the World to Represent

The Top 20 Wealthiest Soccer Teams in 2014

4 BuzzWorthy Cannabis Stocks And Some Smoking Derivative Plays

The 10 Healthiest Fast Food Chains in America to Dine At

The 5 Most Expensive Cat Food Brands You Can Spoil Your Kitty With

The 6 Best eCommerce Platforms for Small Businesses

The 10 Worst Mistakes an Entrepreneur Can Make

The 5 Most OP Characters in League of Legends to Carry Games and Crush Foes With

The 5 Best Foods to Eat Before Running that Will Help You Pound the Pavement

10 Glaring Plot Holes in The Walking Dead that a Zombie-Filled Bus Could Drive Through

The 5 Biggest Celebrity Stoners Who Love Their Reefer

The 10 Most Overrated Movies Of All Time by Out-of-Touch Critics

Top 6 Least Expensive Cruise Destinations For 2015 that Will Take You to Paradise

10 States with Lowest Substance Abuse Rates in America

The 14 Most Watched TV Finales Ever

The 10 Best Selling Role Playing Games of All Time for PC

10 Most Influential Papers In Economics

Top 8 Biggest Charities in the US

10 Worst Celebrity Career Moves Ever

Top 10 Best Paid Tennis Stars in the World

Top 6 Cities For The Ultra Rich to Live in Comfort

10 Cities with High Demand for Nurses

6 of the Worst Greeting Card Messages Ever Crafted

How to Make Money in ArcheAge and Build Your Empire

10 Foods To Eat To Lower Cholesterol Levels

The 10 Most Hated Television Characters of All Time

The 30 Worst Halloween Costume Ideas Ever Brought to Horrible Life

10 Vocational Skills in Demand Today with Jobs Waiting to be Filled

10 Best Places to Visit in Central and South America

The 10 Greatest Empires in History Which Nearly Conquered the World

The 6 Cheapest Boarding Schools In America 2015

5 Clear Reasons LoL is Better than DotA, Continues to Rule MOBAs

The Only 9 Teams with a Chance to Win the Super Bowl

The 15 Most Common Phobias in America that Induce Fits of Panic

Top 6 Least Expensive Tourist Destinations in 2014

Jim Goetz, Peter Fenton, Jim Breyer: Top 6 Venture Investors for 2014

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!