Pop quiz: If the Dow Jones Industrial Average is up about 4% in the last 30 days, what do you think the returns of an ETF with a bearish strategy would be?
If you said down 4%, you’d be largely correct. The ProShares Short Dow30 ETF (NYSE:DOG), for instance, is designed to deliver -100% of the Dow Jones Industrial Average … so it is indeed down 4% in the last month.
But what if I told you there was a bearish fund that is actually up despite a run for the broader market?
That’s exactly what has happened with AdvisorShares’ Ranger Equity Bear ETF (NYSE:HDGE). It is up 1% despite a bearish strategy in an upward market.
Why? Because it is one of the few actively managed bearish funds out there.
You see, instead of just shorting the 30 Dow components as the ProShares DOG fund does, the HDGE bear ETF takes strategic bets on equities it expects to crash and burn. Top holdings (to the downside, of course) right now include Deutsche Bank (NYSE:DB) and Fossil (NASDAQ:FOSL), which are both off more than 8% in the past month or so.
In other words, HDGE is very good at picking bad stocks.
I actually interviewed the Active Bear ETF manager John Del Vecchio about a year ago, and he explained to me that the strategy is as much a hedge (hence the ticker) as a profit vehicle in down times.
“The stock market is far more likely to blow up … than your house is likely to burn down,” he said.
Considering that this bearish ETF can hold firm even when its strategy is out of favor makes that argument pretty compelling.
- Seeing as some think there will be a bear market through 2018, a hedge might be called for. (CNBC)
- In case you’re curious, here’s a comprehensive list of inverse ETFs to play a bear market. (The Slant)
- My complete 2012 interview with HDGE fund manager John Del Vecchio. (InvestorPlace.com)
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.