A Major Downturn Is Inevitable: Here Are Some Ways To Bet On The Coming Decline

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Includes: DRV, SDOW, SGDM, SPPP
by: Evin Rohrbaugh

Summary

A major crash of the US is inevitable.

A series of hard asset, inverse, and income ETFs can allow you to profit from the crash.

It is important to avoid exposure to the US dollar for protection.

There are a lot of people now predicting something big is going to happen in September/October. While a crash is inevitable, I do not feel comfortable predicting the timing for such an event. However, many people do have the feeling that later this year a big event is likely, so for anyone who holds that view, here is a basic basket of securities that are designed to go up when a crash happens, or at least survive throughout the event. There are six ETFs split up into three categories: hard assets, inverse, and income/compounding.

Sprott Physical Platinum and Palladium Trust (NYSEARCA:SPPP)
Expense Ratio-.50%
If you have been around the dollar collapse crowd at all, you will already know about gold and silver as insurance against economic calamity. This recommendation is made very often, so to be a little different, first I include the best platinum and palladium ETF available. The same reasons for owning gold also apply to the PGMs, but they have more of an industrial side to them than just gold. They are also good ways to store a lot of value into a small space. If and when people start to panic and retreat into hard assets, I think these two PGMs will follow gold closely during a crash.

Sprott Gold Miners ETF (NYSEARCA:SGDM)
Expense Ratio-.58%
When it comes to the topic of how mining stocks will perform during a crash, there is a bit of a divide amongst those who do agree that the crash is inevitable. The reason is because the last financial crisis was a deflationary collapse, with gold and silver both going down as well as stocks and real estate. If it happens like that again, then the metals and the miners will go down in price, and most likely the upside will come as a response to the government implementing inflationary policies to try and keep the system together. Other people will say that gold and the miners will be spared from collapsing, and people will move into these assets in order to avoid other assets that are crashing. I don't know which scenario is more likely, but I would not put all of my money into only one of those scenarios. Either way, the Sprott Gold Miners ETF is a solid shotgun approach, but better designed than market cap-weighted ETFs. The 25 holdings in this ETF are factor-based instead of based on size. The ETF is overweight stocks that have low debt, low costs, and good growth potential. The main peer to this ETF is GDX, which has a slightly lower expense ratio of .53, but the factors-based approach of the Sprott ETF make it a better choice for capitalizing on the increase of the gold price.
The next two ETFs are inverse and leveraged, which brings extra risk. Make sure you understand the risk involved.

Short
ProShares UltraPro Short Dow30 ETF (NYSEARCA:SDOW)
Expense Ratio-.95
Shorting the Dow makes sense if you believe that the past five years of growth have more to do with the actions of the Fed rather than true growth and economic recovery. I am not opposed to owning certain companies long term that will likely be around for decades, but when any stock or index has been consistently going up for six years in a row, it is almost impossible to find any real value.

Drexion Daily Real Estate Bear 3x (NYSEARCA:DRV)
Expense Ratio-.99
This ETF is designed to short the US real estate market. While there is no bubble in real estate today the way there was in 2007, there is still more pain to be felt in the real estate market during a crash. For a more extensive look on why the real estate market is fundamentally weak, this article by Lance Roberts addresses the issue very well. The leverage of this fund will amplify any crash or correction the real estate market has.

Income/Compounding
While there are tons of choices as far as ETFs go, for those seeking income producing funds to provide either relatively safe income or savings and compounding that won't be dragged down during a dollar crash, there aren't many choices to fit this specific need. Some ETFs are designed to be ex-US, and some are ex-financials. Both of these attributes help to protect investors from a collapse of the US dollar. Unfortunately there is only one ETF that actually has both attributes, while others are only ex-US or ex-financials. Why is this so important though? It can be tempting to chase higher yields from a fund focused in the US and with loads of equities in the financial sector, but they come with long-term risk. These two areas are the most vulnerable from a dollar collapse scenario. Remember how well the big banks did during the last crisis? Other companies crashed as well, but the next crash will likely change the structure of the entire financial system. The safest kind of income you can get should be from international companies that produce/sell tangible goods, not US-based financial firms. This is not meant to lump all financial institutions into one, high-risk, category. Your local credit union is a different animal than the biggest, publicly-traded banks in the US. This doesn't mean however, that you should put all of your trust and money into any one institution whether it is a community bank, a life insurance company, or a private annuity.

When it comes to income producing/compounding funds, general diversification is not a bad idea. Corporate bonds offer lower yield with more safety of principle, preferred shares offer more yield with less safety, and common shares of course offer higher yield with even less safety of principle. The problem now is that no corporate bond or preferred share ETFs offer what we are looking for as far as staying away from the US and from the financial sector. Some come close, such as PFXF which is an ex-financials, preferred share ETF but with most of its exposure in the US. For the safest income possible though, the only two picks are an international, ex-financials dividend ETF and an ex-US real estate ETF.

WisdomTree International Dividends ex-financials(NYSEARCA:DOO)
Yield-4.22%
Expense Ratio-.58
This is the ETF I mentioned earlier that is the only one that truly avoids the US and the financials. The catch is, since there is no exposure to the US stock market, the returns will not match the Dow and the S&P. You will get laughs if you compare the returns of this ETF to a popular one such as SPY. Yes, the Dow and S&P have gone up for six years, but that growth is built on the back of all the currency that has been injected into the system. Avoiding the US market right now would bring one ridicule in the short term, but the long-term fundamentals are simply too important. The only real value in the Dow and S&P are a few select energy and mining companies. This ETF will help you compound on a quarterly basis with the safety of knowing you won't get caught up too badly in a market crash. I would expect the share price to go down some when the crash happens, but not dramatically.

There are not really any peers as far as ETFs that meet the requirements already discussed. There are a couple of mutual funds that get close so we will compare those.
Voya Global Equity Div & Prm Oppty Fund-IGD
This dividend mutual fund offers a tempting 10.78% yield as well as international diversification. This higher yield is achieved through the use of options and currency hedging, which brings more risk into the equation. Even though the focus is international, the holdings are still overweight financials and overweight the US. Also the expense ratio of 1.22% is inherently higher than most ETFs because this is a mutual fund.
Europac International Dividend Income-EPDPX
This fund is run by Peter Schiff and it basically works to get international yield while avoiding exposure to the US dollar. The main issue with this fund is again with the higher expense ratio inherent in mutual funds versus ETFs, but also the yield at 3.37% is lower than DOO.

Vanguard Global ex-US Real Estate Fund(NASDAQ:VNQI)
Yield-3.84
Expense Ratio-.24
Since there are no preferred share or corporate bond funds that offer enough protection, the only other relatively safe form of income is from an ex-US real estate fund. This again, could certainly go down from the ripple effect that a dollar crash would cause. It should offer enough cushion that you can compound your money without too much worry. This ETF has a lower expense ratio than two other ex-US reits, WPS and IFGL, which both have an expense ratio of .48. The yield is also the slightest bit higher in VNQI.

The danger in this overall strategy is that the longer you are wrong, the more money you will lose. This is not for everyone of course, but if you have a feeling that a crash is in fact coming later this year, maybe now is the time to bet on it.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.