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ETFs for the ‘Worst Six Months’

04/14/2015 9:00 am EST


Jeffrey Hirsch

Editor-in-Chief, The Stock Trader's Almanac and Almanac Investor

The end of the ‘Best Six Months’ is rapidly drawing near and the historically ‘Worst Six Months’ of May to October is approaching, explains market historian Jeffrey Hirsch in Stock Trader's Almanac Investor.

Due to the Fed’s zero interest rate policy (ZIRP), most money market accounts (and similar places to park cash during the ‘Worst Six Months’) pay literally nothing. This leaves few alternatives aside from the relative safety of Treasury bonds.

The problem here is longer-dated maturities offer the best yield, but also tend to be the most volatile. So any benefit of a higher yield can be quickly erased by a drop in bond price. To lessen volatility, shorter duration bonds are best, but here again, due to ZIRP, they also offer next to no yield. 

The best approach would be to own Treasury bonds across the entire duration spectrum. By doing so, yield is likely to be more attractive and volatility could be trimmed.

iShares Core Total US Bond Market (AGG) nicely does just this. It holds Treasuries of multiple durations—yields right around 2%—and exhibits more price stability than other longer-dated Treasury bond ETFs.

AGG has more than $24 billion in assets, trades more than 1 million shares a day on average, and, best of all, its expense ratio is just 0.08%. AGG can be bought on dips below $110.12.

Our next ETF to consider trading during the ‘Worst Six Months’ is iShares 20+ Year Treasury Bond (TLT). Its holdings are all long duration Treasury bonds and its current yield is right around 2.5%.

TLT offers a modest yield advantage over AGG, however; price movement is its real advantage (or disadvantage). Should the market unravel in a meaningful manner later this year, TLT could enjoy a rather robust rather.

TLT’s two biggest downside risks are a solid economy and market that prompts the Fed to boost rates sooner rather than later. TLT can be considered on dips below $124.88.

AdvisorShares Ranger Equity Bear (HDGE) is the most aggressive ‘Worst Six Months’ defense to consider. HDGE is an actively managed ETF that establishes short positions in individual stocks.

For HDGE to be a homerun, the market needs to suffer a substantial breakdown in the ‘Worst Six Months.’ Even if the market moves sideways, HDGE’s rather lofty 2.92% net expense ratio is going to be a drag.

More than half of this fee is the cost of active management while short interest expense adds another 1.22%. HDGE can be considered on dips below $10.95.

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