Investing When Both Stocks and Bonds are Crashing

What’s Behind the Sell-Off?

It’s necessary to understand why both the stock and bond markets are crashing. Let’s start off with the latter and revert to the prior afterward.

Bonds are theoretically deemed equilibrium fixed-income investments, causing their coupons to have an inverse relationship with their prices. The coupons increase with rising interest rates, which also causes bond yields to rise and, subsequently, their coupons. If high-yielding bonds are held to maturity, investors will profit dearly from the asset. However, it’s not always lucrative to hold on to bonds considering their long duration in an uncertain economy where default risk isn’t out of the picture.

Like the bond market, the stock market is also struggling, and it’s unusual to witness a strong correlation with investment-grade bonds. However, there’s a reason for the current bearish correlation between the two asset classes. Stocks and bonds are facing pressure from surging inflation, in turn eroding the value of both asset classes.

Stocks, in particular, aren’t coping well at the moment due to an arguably overvalued market, which is filled with growth stocks that aren’t well geared for a rising interest rate environment.

We’ll likely continue to experience a bear market for both stocks and bonds. Yet, there’s a method to avoid further portfolio losses. I screened for three assets that I’m bullish on during these trying times.

Advocate Rising Rate Hedge ETF

Advocate Rising Rate Hedge ETF (RRH) is a hedge fund-Esque ETF managed by Advocate Capital Management. The fund utilizes long/short strategies with exposure to both derivatives and underlying instruments across various asset classes.

Hedge fund strategies are often negatively correlated to the bond market and exhibit a low correlation to general equity funds in bear markets. Moreover, RRH is geared explicitly toward protection against a rising interest rate environment such as the one we’re currently facing, suggesting that it could be a “best-in-class” ETF pick right now.

Advocate Rising Rate Hedge ETF has garnered momentum lately as it’s trading above its 50- and 100-day moving averages, indicating that it’s a popular play for investors at this stage. Furthermore, RRH is operated at an expense ratio of only 0.85% and started paying a dividend of 1 cent per share last year (only two months after its inception).

WisdomTree Bloomberg U.S. Dollar Bullish Fund

WisdomTree Bloomberg U.S. Dollar Bullish Fund (USDU) is a WisdomTree managed ETF with the mandate of tracking lucrative currencies, especially the U.S. dollar.

I’m bullish on this asset as key metrics indicate that the U.S. dollar is significantly undervalued. For instance, U.S. government bond yields are sloping upwards, suggesting that the market anticipates aggressive interest rate hikes in the near future, which could pull the U.S. dollar along with it.

Furthermore, matters in Ukraine and a renewed lockdown of the Chinese economy could mean that the United States would need to provide a larger proportion of global exports, in turn giving rise to the nation’s current account and, subsequently, the U.S. dollar.

USDU is a lucrative option to take advantage of the mentioned tailwinds. The ETF is currently trading above its 10-, 50-, 100-, and 200-day moving averages, indicating that it’s on a momentum trend. Furthermore, the ETF provides investors with a low-cost, low-risk opportunity at a standard deviation of 5.11 and an expense ratio of only 0.5%.

Vanguard Consumer Staples ETF 

Vanguard Consumer Staples ETF (VDC) is a consumer staple pure-play managed by Vanguard. Consumer staples are always a safe play, as their exposure to cyclicality is limited.

According to Chris Carey of Wells Fargo (WFC), consumer staples will continue to outperform the market as the sector has the ability to survive economic headwinds, which could see investors run for the hills.

Some of Vanguard Consumer Staples ETF’s largest holdings include high-quality stocks such as Coca-Cola (KO), Walmart (WMT), and Procter & Gamble (PG). The ETF also provides a solid dividend of $4.06 per share at a forward yield of 1.5%, which erodes its already low expense ratio of 0.10%.

Lastly, Vanguard’s Consumer Staples ETF is nearly oversold at a relative strength of 40.6, meaning that it presents investors with a good deal at its current price level.

The Bottom Line

The market’s in a tough spot, but there’s a way out of it. Actively managed ETFs and consumer staples exposure could add robustness to any portfolio during the current market climate.

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