How the Betashares Australian Equities Bear Fund will see you profit when the ASX falls

If you are concerned about the impact a potential bear market might have on your share portfolio, an inverse ETF can help provide you with some downside protection.

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

A combination of macroeconomic factors caused a wave of volatility to sweep through global markets during the latter half of 2018, none of which show any signs of easing early in 2019.

The unpredictability of the Trump administration, rising global interest rates, a strengthening US dollar, international trade tensions between China and the US, falling oil prices and signs of a slowing Chinese economy have created a litany of reasons for investors to feel nervous about a potential bear market.

Taking their cue from US tech giants like Apple, Amazon and Netflix, local tech growth stocks with high valuations have been hit especially hard. Since reaching 52-week highs back in late August or early September, market darlings like Afterpay Touch Group Limited (ASX:APT), Appen Limited (ASX:APX) and WiseTech Global Limited (ASX:WTC) have all suffered high double digit losses.

Even traditionally defensive healthcare stocks have been hurt by the global rout in equities. Blue-chip stocks Cochlear Limited (ASX:COH) and CSL Limited (ASX:CSL) are both nearly 20% off their September highs.

Blue-chip miners with Chinese exposure have had a subdued start to 2019, driven by weakening factory activity across Asia coupled with ongoing trade tensions between China and the US.

BHP Group Limited (ASX:BHP) and Rio Tinto Limited (ASX:RIO) both shed over 1.5% in the first week of 2019. And with more uncertainty on the horizon, 2019 could be a tough year for the big miners.

In these times of turbulence there are a few approaches you can take. If you have made some strong gains in any of your holdings, you could seize this opportunity to de-risk your portfolio by taking some profits off the table. On the other hand, if liquidity isn't a concern and you take a longer-term – and possibly more optimistic – view of the market, now might be a good time to think about accumulating shares in solid growth companies.

The current climate could provide good buying opportunities for tech companies like WiseTech and Altium Limited (ASX:ALU) both of which have high rates of recurring revenues to help them ride out an economic downturn. Similarly, highly-differentiated, high-margin healthcare companies like Cochlear and CSL as well as ResMed (ASX:RMD) may offer great upside potential for longer-term investors at their current deflated prices.

However, if you're more concerned about reducing volatility in your portfolio, another option might be an inverse ETF. These are portfolios of stocks that trade on the ASX like regular shares, but are specifically designed to do the exact opposite of their benchmark index.

An example is Betashares Australian Equities Bear Hedge Fund (ASX:BEAR) which aims to generate returns which are negatively correlated with the S&P/ASX 200. Since the beginning of September, the BEAR Hedge Fund has risen close to 12%. This is very close to the loss on the S&P/ASX 200 over the same time period.

This shows the downside protection an ETF can provide, especially if you hold a diversified portfolio of blue-chip stocks that tends to be closely correlated with movements in the broader market. It will also limit your potential upside, as the value of the ETF will drop as your other investments rise. However, if you anticipate periods of increased market volatility or even a possible crash, an inverse ETF can help you sleep a bit more soundly at night.

Motley Fool contributor Rhys Brock owns shares of AFTERPAY T FPO, Cochlear Ltd., Altium and WiseTech Global. The Motley Fool Australia owns shares of AFTERPAY T FPO, Altium, Appen Ltd, and WiseTech Global. The Motley Fool Australia has recommended Cochlear Ltd. and ResMed Inc. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Share Market News

Man pointing an upward line on a bar graph symbolising a rising share price.
52-Week Highs

8 ASX 200 shares hitting multi-year highs today

These shares have defied the trend, hitting new price milestones amid a day in the red for the ASX 200.

Read more »

Broker Notes

Brokers name 3 ASX shares to buy today

Here's why brokers are feeling bullish about these three shares this week.

Read more »

A young man punches the air in delight as he reacts to great news on his mobile phone.
Share Gainers

Why EOS, Evolution Mining, Renascor, and Woodside shares are jumping today

These shares are ending the week on a high. But why?

Read more »

Person with thumbs down and a red sad face poster covering the face.
Share Fallers

Why Accent, Cettire, Ioneer, and Pro Medicus shares are dropping today

These shares are ending the week in the red. What's going on?

Read more »

A group of three miners in hard hats and high visibility vests confer at a rocky mining site.
Broker Notes

Up 66% in a year, just how much more upside does Macquarie tip for Perseus Mining shares?

Just how much higher might Perseus Mining shares soar? Here’s what Macquarie had to say about the ASX 200 gold…

Read more »

Rising share price chart.
Broker Notes

Why this exciting ASX 200 share could rise almost 50%

Bell Potter has good things to say about this biopharmaceutical company.

Read more »

A man holds his head in his hands after seeing bad news on his laptop screen.
Share Market News

Guess which popular ASX stock is crashing 21% today

Its earnings are expected to fall well short of consensus estimates.

Read more »

Buy and sell written on silver cubes on a stock market chart.
Broker Notes

2 buys and 2 sells in the ASX 200 financials sector: analysts

We reveal what the experts think of these ASX 200 financial shares.

Read more »