Protect Yourself (and Profit) From the Next Crash

Original post

As The Oxford Club’s ETF Strategist, I comb through hundreds of exchange-traded funds (ETFs) trading on U.S. stock markets each day.

I then apply a dozen or so proprietary algorithms displayed on several trading screens to this ever-expanding universe…

And select the ETFs with the very best prospects.

I call these screens my “ETF cockpit.”

Like a pilot tracking ever-changing flying conditions, I monitor trends in the investment world through ETFs.

That’s how I know that U.S. midcap and healthcare stocks are currently the strongest performers.

And that natural gas, China and the British pound are each in one of their biggest bear markets ever.

The task of monitoring these ETFs grows more complicated every day.

That’s because about 140 ETFs – or their functional equivalents, exchange-traded notes – have been launched already in 2018.

That works out to about one new ETF for each trading day.

Of course, this is all good news.

It further confirms that ETFs allow you to construct any kind of portfolio you want.

I’ve compared ETFs to Lego blocks, which allow you to build, brick by brick, a portfolio to fit your specific investment objectives.

Whatever the asset class, whatever the investment theme, whatever the current direction of the market… there’s probably an ETF you can invest in.

Here is a terrific example…

Investors always fear a looming market crash.

Luckily, there are a handful of inverse ETFs that allow you to protect your portfolio.

If you’re convinced that the Nasdaq is overvalued, you can bet against it by buying the ProShares Short QQQ ETF (NYSE: PSQ).

If the Nasdaq drops 10%, this ETF will rise by the same amount.

Invest in the ProShares UltraShort QQQ ETF (NYSE: QID), and when the Nasdaq drops 10%, the fund will jump around 20%.

Finally, the ProShares Trust UltraPro Short QQQ ETF (Nasdaq: SQQQ) offers 3X short exposure.

A 10% tumble in the Nasdaq could generate up to 30% returns.

Get your timing right, and you can make more money, more quickly than you ever could in a raging bull market.

The Remarkable Creativity of ETF Investing

Inverse ETFs are a well-established part of the ETF world.

But I recently came across three new ETFs being launched by Innovator Capital Management that impressed me even more.

This trio of ETFs aims to protect you from drops of 10%, 15% or 30% in the S&P 500 Index.

These Innovator ETFs are also designed to capture some of the upside in the market. (In contrast, inverse ETFs make money only when the market drops.)

Put another way, you can have (some of) your cake and eat (some of) it too.

Specifically…

  • Innovator S&P 500 Buffer ETF (BJUL) tracks the S&P 500’s return to the preset cap and buffers investors against the first 9% of losses over the outcome period.
  • Innovator S&P 500 Power Buffer ETF (PJUL) tracks the S&P 500’s return to the preset cap and buffers investors against the first 15% of losses over the outcome period.
  • Innovator S&P 500 Ultra Buffer ETF (UJUL) tracks the S&P 500’s return to the preset cap and buffers investors against the first 30% of losses over the outcome period. The buffer kicks in following a 5% decline in this ETF.

The timing for the launch of these “buffer ETFs” is excellent for two reasons.

First, the U.S. market is in the final innings of a nine-year bull run – it will be the longest in history in several trading days. A bear market is inevitable. And investors are looking for downside protection.

Second, retiring baby boomers want to continue growing their assets while not putting their nest egg at risk.

Now, how these ETFs will perform in the real world remains to be seen.

So I’m not recommending you pile into them right away.

Still, I’m impressed by the innovative thinking behind these ETFs.

And they offer you a terrific option to protect yourself from the next market crash.

Good investing,

Nicholas