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Believe in Icahn? Go for These Defensive ETFs

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Equity bears are on the prowl all over the globe. Well, swooning international equities, especially the vulnerable emerging markets and persistently weak developed economies may well explain why bears are flexing muscles beyond the border. But the otherwise steadier U.S. economy has also not been spared.

If we go by the recent comments from billionaire activist investor Carl Icahn and Goldman Sachs' latest cut in the S&P 500's year-end price target, we will hardly see any bull raging in the fourth quarter, which includes the all-important holiday season or the biggest selling-period of the year.

All these are not shocking or sudden though! Investors started getting cues from the latest Fed meet when officials pushed themselves back from crossing the line of monetary policy easing, citing global growth worries and subdued inflation. The concerns were mainly initiated by hard landing fears in China, return of deflationary threats in Euro zone, slouching emerging economies and a never-ending slump in the commodity market.

Icahn's Concerns

As per Icahn, protracted low rates create bubbles in financial markets, real estate and even in art markets, and we might soon hear the loud noise of a bubble popping. The veteran investor went on to say that the markets appear overvalued and that the earnings are ' misstated '.

Notably, as per the Zacks Earnings Trend issued on September 23, 2015, the S&P earnings will likely decline 5.8% in Q3 on 3.9% lower revenues. The earnings decline looks the most acute in five quarters.

In any case, the U.S. market, though the solo star in the developed league, will likely see volatility at the tail end of this year. If the Fed stays put in its future meetings, investors would take it as alarming signals of faltering global growth and if it enacts a lift-off, the stocks would stumble in the absence of cheap dollar inflows.

Added to this, political uncertainty will be there to end this year which could even lead to a government shutdown. Attributing to these offhand factors, Goldman Sachs also slashed its year-end price target forecast for the S&P 500 from 2,100 to 2,000 .

Thanks to these growing worries, many investors are growing skeptical about a broad recovery. Stocks have also started to reflect this pessimism lately while many portfolio managers and analysts have become increasingly bearish in recent weeks as well.

Given this trend, some investors may want to position their portfolios to wait out the upcoming bear market (possibly). Below, we highlight four lucrative defensive ETFs that could be used in a bear market. All these funds bettered SPY (down over 3%) even in a quiet September and thus can be good candidates to play a difficult market (read: 5 Smart Beta ETFs to Beat the Choppy Market ).

U.S Market Neutral Anti-Beta Fund (BTAL)

Investors who want to shift their focus to investing in low beta stocks during this uncertain market environment can consider adding BTAL ETF to their portfolio. This fund tracks the Dow Jones U.S. Thematic Market Neutral Anti-Beta Total Return Index which is an equal weighted, dollar neutral, sector neutral benchmark. The index identifies the lowest beta stocks and goes long on them, while at the same time going short on the highest beta stocks (read: Long/Short ETFs to Fight This Stormy Market ).

This fund invests in equal dollar amounts for both the long and short positions, and looks to profit from the spread return between low and high beta stocks. This product is thin on AUM having amassed just $6 million in assets. It trades over 5,000 shares daily on average which results in a wide bid/ask spread and high trading costs. The fund charges 99 basis points as expenses and gained 4.8% in the last one month (as of September 29, 2015).

AdvisorShares Active Bear ETF (HDGE)

The ETF is actively managed and seeks capital appreciation by taking short positions in a number of U.S. listed companies. The securities selected for the fund are based on the philosophy from Ranger Alternative Management, which utilizes a bottom-up, fundamental, research driven security selection process.

In order to find these potentially weak firms, the managers in HDGE look to the income statement for clues. They focus on aggressive revenue recognition, inventory issues, reserve concerns, serial charges and tax issues, among others, to pinpoint companies that may be masking weakness (read Hedge Your Portfolio with the Equity Bear ETF ).

The fund has amassed $141.0 million in its asset base while trades in good volumes of around 235,000 shares a day on average. However, it is a bit pricey when compared to other hedging products. Management fees come in at 1.5%. HDGE was up 3.3% in the last one month.

WisdomTree Managed Futures Strategy Fund (WDTI)

This actively managed fund seeks to deliver positive returns in rising or falling markets that are uncorrelated to equity or fixed income returns. It uses a quantitative, rules-based strategy to provide returns that correspond to the performance of the Diversified Trends Indicator and invests in a combination of U.S. treasury futures, currency futures, commodity futures, commodity swaps, U.S. government and money market securities.

The $206 million-product trades in a light volume of about 30,000 shares a day. Expense ratio comes in at 0.95%. The fund was up about 0.8% in the last one month.

QuantShares US Market Neutral Value Fund (CHEP)

CEHP could be an interesting choice in today's muddled environment. A market neutral approach rules out these high flyers and considers more stable stocks can easily be found in an ETF form with CHEP, and could be an interesting pick for many investors if Icahn's fear comes true.

The ETF tracks the Dow Jones U.S. Thematic Market Neutral Value Index which looks to take long positions in the most undervalued, and go short the most overvalued stocks. The process is done by investing in securities that have below-average valuation ratios such as earnings to price, book to price, and cash flow from operation to price ratios. Then, the firm shorts securities that have the highest weightings, making sure to be equal weighted, dollar neutral and sector neutral at the same time (read: Uncertain about the Economy? Try Market Neutral ETFs ).

The $2.5 million-fund is quite pricey as its expense ratio stands at 1.49%. Moreover, a paltry trading volume results in high trading costs too. The fund was up over 1% in the last one month.

IQ Hedge Market Neutral Tracker ETF (QMN)

This product tracks the IQ Hedge Market Neutral Index, which seeks to replicate the risk-adjusted return characteristics of hedge funds using a market neutral hedge fund strategy. It invests in both long and short positions in asset classes while minimizing exposure to systematic risk. This strategy seeks to have a zero beta exposure to one or more systematic risk factors including the overall market (as represented by the S&P 500 Index), economic sectors or industries, market cap, region and country.

The portfolio consists of a variety of ETFs including a number of fixed income funds and equity funds. The ETF allocates heavy weights in fixed income products like Vanguard Short-Term Bond ETF ( BSV ), and iShares 1-3 Year Treasury Bond ETF ( SHY ) and Vanguard Total Bond Market ETF ( BND ) focusing on Treasury and corporate securities that are of high quality and come across as a good bets for investors having low risk tolerance.

The ETF is often overlooked by investors in the hedge fund space with AUM of just $19. It charges 75 bps in fees and expenses and was up over 0.3% in the last one month.

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IQ-HEDGE MKT NT (QMN): ETF Research Reports

QS-US MN VALUE (CHEP): ETF Research Reports

WISDMTR-MF SF (WDTI): ETF Research Reports

ACTIVE-BEAR (HDGE): ETF Research Reports

QS-US MN AN-BET (BTAL): ETF Research Reports

SPDR-SP 500 TR (SPY): ETF Research Reports

VANGD-SHT TRM B (BSV): ETF Research Reports

VANGD-TOT BOND (BND): ETF Research Reports

ISHARS-1-3YTB (SHY): ETF Research Reports

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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