In stock trading, a “correction” is said to occur when the stock market declines by more than 10%. During times like that, ETFs such as Vanguard Utilities ETF (VPU), ProShares Short Russell 2000, and SPDR S&P 500 ETF Trust (SPY), may be your best shots.
“A market downturn doesn’t bother us. It is an opportunity to increase our ownership of great companies with great management at good prices.” – Warren Buffett.
Stocks do not go up forever. After bullish runs, they always tend to ‘correct’ themselves. The resulting bearish moves can be a full bloodbath sometimes. When a stock declines by at least 10% from its peak price, it is said to undergo “correction.” It is not only individual stocks that undergo corrections, however; market indices do, too.
Exchange Traded Funds (ETFs)
Exchange traded funds (ETFs), most especially the inverse ones, are one of the most effective ways to prepare for market corrections. An inverse ETF mimics the performance of the index it tracks, but in the opposite direction.
Vanguard Utilities ETF (VPU)
If you are looking for a safe ETF that still promises decent returns, Vanguard Utilities ETF (VPU) is what you should go for. No matter the direction of the economy, utilities, being essentials, are always in demand. In fact, in recessions which are usually accompanied by stock market plunges, people cannot do without basic utilities such as electricity and water. However, with all their benefits, utilities companies tend to have relatively slow growth rates.
Nevertheless, a utilities-centered ETF like the VPU deliver reasonable returns in moments of market panic.
ProShares Short Russell 2000 (RWM)
From February 20 to April 7, 2020, there was a major and sudden stock market crash all over the world due to the COVID-19 pandemic. From February 19 to March 23, the S&P was down by a whopping 33.8%. But guess what? Many inverse ETFs still did well, and the best-performing of them was the ProShares Short Russell 2000 (RMW), an ETF that uses both ETF and index swaps to be inversely exposed to its underlying index, the Rusell 2000.
The ProShares Short Russell is highly susceptible to American sociopolitical climate. However, it has a very high fee, making it most suitable for one-day use.
SPDR S&P 500 ETF Trust (SPY)
The SPDR S&P 500 ETF Trust (SPY) enables investors to make bearish bets against the benchmark index, the S&P. This ETF has many advantages: huge size, high liquidity, and a very close approximation of the performance of the index it tracks. Apple, Microsoft, Amazon, Facebook, Alphabet, Tesla, Berkshire Hathaway, Johnson & Johnson, and JPMorgan Chase & Co. are its 10 largest holdings.
Over the past decade, the S$P 500 ETF Trust (SPY) has consistently produced modest returns, with an average annual return of 13.25%.
In the stock market, you do not win all the time. In fact, expect to win some and lose some. That is how it works. So, if you have been winning, now might be the best time for you to prepare for a market correction. Inverse ETFs are an excellent tool you can use to get the same or even more value when it eventually happens. The ones investor should consider are Vanguard Utilities ETF (VPU), ProShares Short Russell 2000 (RWM), and SPDR S&P 500 ETF Trust (SPY).