Does it still make sense for investors to invest in ETFs that track market indices?
For long-term investors (>8 year investment horizon), it is best not to try timing the market. Regardless of market conditions, ETFs that track market indices are the best risk-adjusted, low-cost, diversified equity instruments for long-term investors.
Should investors leave funds in exiting ETF investments that track an index?
Long-term investors should leave funds in existing ETF investments that are index trackers even in a bear market. Often, most investors who exit their ETF investments during a bear market to switch to cash either forget to re-invest their cash into equities and as a result miss out on the upward swing that usually follows a bear market.
Which sector specific ETFs might make sense for investors to allocate funds to at the moment?
Other sectors that investors may choose to allocate funds are to the medical sector, information technology, consumer staples, and utilities. Consumer staples, utilities, and healthcare are defensive plays that are appropriate for any bear market. Consumer staples are defensive as consumers still need food and beverages and products that consumers have no desire to cut from their budgets. For an economy to function, whether weak or strong, all consumers need access to electricity and water, thus utilities also have the benefit of generating stable high dividend yields. Regardless of market conditions, people will always require medical aid and with an aging population that needs more healthcare services, including healthcare ETFs in your portfolio are both defensive and growth plays.
Specific for the COVID pandemic, defensive plays should include industries and sectors that have still continued to function despite lockdowns. These are information technology and telecommunications sectors. Technology workers can work remotely, and the services they provide are crucial for continuing day-to-day operations such as ordering groceries and food delivery, and entertainment to make lockdowns or movement restrictions for a bulk of the population more bearable. Telecommunication sectors are internet service providers, wireless providers that enable remote working, entertainment, and communication during lockdowns to be possible and is therefore a required service.
Would investors be better to allocate funds to actively managed ETFs at the moment - or not? And why?
Generally, academic research shows that actively managed funds tend to underperform low-cost, passive index tracker ETFs over the long-term. However, opportunistic investors who have a higher risk profile and are looking to profit in the short-term from a bear market can access leveraged ETFs on the ASX such as BBUS, BBOZ, and BEAR.
BEAR and BBOZ (BBUS) are for investors who seek to protect or profit from a declining Australian (US) share market. Generally, all three are actively managed leveraged ETFs that short the futures market of each country’s respective market index to obtain exposure that is negatively correlated to the market index. BBUS and BBOZ (BEAR) are leveraged inverse ETFs such that a -1% on the market index results in an approximately +2.5% (+1%) change in the ETF.
1 Mar 2020
How has thinking changed around ETFs in a bull market?