The Perfect ETF Should The Bear Come Out Of His Cave

The first quarter of 2012 has been nothing short of exciting, as Europe managed to take us to the edge of the cliff and back again with another wild ride of bailouts and financial manipulation.

In recent days, China, the 900 pound gorilla of Asia, has also started showing signs of a potential slowdown and economic contraction, and just last week we witnessed what could be the beginning of a large market correction.

After a fast start to 20122 with major indexes making new multiyear highs, many analysts argue that the US economy is actually recovering and markets will continue their recent rebound.However, with late breaking warnings of recessionary activity in Europe and economic slowdowns in China, along with newfound weakness in the S&P 500, one might want to consider a back-stop just in case the bear is about to come out of his cave yet again.

To counteract a possible bear bite, investors could look to a relatively new exchange traded fund, Active Bear ETF (NYSEARCA:HDGE) for a way to profit from any potential oncoming global upheaval or massive market correction.

Active Bear is part of a relatively new class of ETF, those which are actively managed, and this particular one offers “short” exposure to equity markets through the short sales of domestic securities.It short sells a portfolio of 20-50 liquid U.S. traded equities in an attempt to outperform during market declines and offer a hedging vehicle during normal market conditions.It looks for companies with poor earnings quality, accounting problems or earnings events that could lead to lower share prices and then shorts those stocks.

As an actively managed ETF, it comes with a management fee that will lower overall return.However, it also offers the significant advantage over inverse ETFs of not having the tracking error that is inherent in these products as they are priced on a daily basis and so can compound against you if the underlying index moves against your position.

So, although the Active Bear ETF comes with a management fee, NYSEARCA:HDGE is a solid bet for investors who are less than optimistic about the future direction of the U.S. stock market or for those who want to hedge current positions they own.Active Bear offers the potential to protect one’s portfolio from another unwelcome bear bite and also could be useful in normal market conditions as it offers a way to hedge equity exposure for buy and hold investors, diversify one’s portfolio and find companies whose share prices could decline even while the broader indexes are in an uptrend.

Disclaimer: Wall Street Sector Selector trades a wide variety of ETFs and positions can change at any time.