Bear Market: This Is How to Save Yourself from Negative Interest Rates

Bear MarketThe global markets are in bear market territory with the MSCI All Country World Index down more than 20% from a high set last May. It’s not surprising when you look at ongoing weakness in oil prices, weak global growth, and a growing number of global central banks tapping negative interest rates to kickstart their anemic economies. Investors looking to weather the storm but not sure where to turn might want to consider ETFs that provide growth during bear markets and times of economic distress.

Negative Interest Rates All the Rage with Central Banks

The global markets are in bear market territory and getting hammered. Finally, central banks from around the world are waking up to the idea that things aren’t going to get better any time soon. And they’re looking for whatever is left in their collective bag of tricks.

On Tuesday, February 16, the Bank of Japan’s negative interest rates came into effect, highlighting the country’s lack of options to kickstart its economy in the midst of a global slowdown. The Bank of Japan (BoJ) will charge banks 0.1% for additional deposits in an effort to encourage lending and prompt businesses to loan and individuals to spend. (Source: “Bank of Japan Launches Negative Interest Rates,” The Guardian, February 16, 2016.)

The Bank of Japan’s efforts are widely seen as a failure. Back in January, after the BoJ first announced its plans, Japanese share prices rebounded and drove down the yen’s value. However, the excitement was short-lived and the markets quickly reversed.

Japan, the world’s third-largest economy, isn’t the first to discover that artificially low interest rates (let alone negative interest rates) don’t provide the necessary foundation for long-term, sustainable economic growth.

The U.S, the world’s largest economy, received $3.5 trillion from the Federal Reserve as part of the central bank’s generous quantitative easing (QE) strategy. What does the country have to show for it? Not much but an overvalued stock market in free-fall, fourth-quarter gross domestic product (GDP) of 0.7%, and a weak outlook. As a result, the Federal Reserve may have to rethink its promise to raise rates in 2016. (Source: “GDP Increases in Fourth Quarter,” Bureau of Economic Analysis, January 29, 2016.)

Our affable Canadian friends to the north could adopt negative interest rates within the next two years. Plunging oil prices forced the Bank of Canada to actually lower its key lending rate twice in 2015. Its overnight rate now stands at 0.5%.

If Canada does introduce negative interest rates, it will join an illustrious group. The European Central Bank (ECB) introduced its negative interest rate policy back in June 2014, lowering its lending rate to -0.1%; three months later, it lowered it to -0.2%; and in December 2015, it lowered it again to -0.3%. Mario Draghi, president of the ECB, recently signaled it could unveil additional stimulus measures in March to support its flagging economy. (Source: “Stock markets rally as Mario Draghi hints further stimulus on way,” The Guardian, February 15, 2016.)

Sweden’s central bank launched negative interest rates in July 2014, when it dropped to
-0.5%; Denmark’s central bank has a negative interest rate policy of -0.65% and the Swiss National Bank’s benchmark rate languishes at -0.75%. As the global economy slows, more central banks will follow suit.

7 Bear Market Essentials

Where should investors turn when the global markets are in bear market territory and the outlook for the next two years or more looks grim? There are a large number of bear market exchange-traded funds (ETFs) designed to make money when the markets lose ground.

If you think oil prices will continue to crater, a bear market ETF with exposure to oil will help you profit on that action. Similarly, an S&P 500 bear market ETF goes up when the market goes down.

Some of the better ETFs to watch for the current bear market include:

  • ProShares Short Dow30 (ETF) (NYSEArca:DOG)
  • ProShares Short S&P500 (ETF) (NYSEArca:SH)
  • ProShares UltraPro Short Russell2000 ETF (NYSEArca:SRTY)
  • Credit Suisse AG – VelocityShares Daily 2x VIX Short Term ETN (NASDAQ:TVIX)
  • Hori. Beta. NYMEX Cr. Oil Br. Pl (ETF) (TSE:HOD)
  • Proshares Trust II (NYSEArca:SCO)
  • DB Crude Oil Double Short ETN due June 1, 2038 (NYSEArca:DTO)

That said, these kinds of ETFs lose ground when stability returns to the markets. As a result, bear market ETFs are a better short-term strategy or are a good idea for those who have greater risk tolerance and can pay close attention to their investments. In other words, bear market ETFs are not a great buy-and-hold strategy.