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Surviving the Coronavirus meltdown with ETFs & LICs

With share markets down almost 20% in a few short weeks, the Coronavirus selloff has been fiercer than most in history. Today we look at a few tactics using ETFs and LICs to allow your portfolio to survive and prosper the latest market falls.

By ETF Watch - Mar 09, 2020

In January and early February as news spread of the worsening Coronavirus pandemic in China, share markets, known for catching a cold at even the slightest sneeze in global activity, surprisingly did not react. The Australian share market continued its bull run, adding about 6% from December highs, to hit record highs by the 20th of February.

Things quickly changed in late February. As it became clear that the Coronavirus (COVID-19) would not be contained and was multiplying in countries far from China such as Italy and Iran, the cold that the share market had avoided hit like a bad case of COVID-19 pneumonia. In just 6 trading sessions, global share markets entered ‘correction’ territory (a retreat of more than 10%) and less than 3 weeks later we look set to enter ‘bear market’ territory (a retreat of more than 20%). The old proverb that the share market takes the staircase up and the elevator down is ringing true as panic and forced selling kicks in!

The falls in late February saw the ETF market record its first monthly retreat in recent memory, closing the month at $63.6 Billion in size, down 3.1% from January. March looks set to record more contraction as fear strikes.

As we write this on the evening of 9 March 2020, crude oil is down 30% over the weekend, falls not seen in almost 30 years and the the Australian share market closed the day down 7.3%, a daily fall not seen since the depths of the 2008 GFC. below you can see the average falls across ETFs in each major region and sector since 20 February.

Region/SectorManagement TypeNumber of ETFsAvg Performance 20 Feb - 9 Mar
Australian SharesPassive18-19.56%
Australian SharesSmart Beta19-18.27%
Australian SharesActive10-15.44%
Global SharesPassive43-12.44%
Global SharesSmart Beta28-14.35%
Global SharesActive14-11.87%
Property & InfrastructureAll12-9.93%
Physical CommoditiesAll6-14.49%
Inverse Index EquitiesAll342.77%

The above does not tell the complete story. Crashes in the oil market has seen Australia only Crude Oil ETF (OOO) down 42% over the period. Bank and Resource focused ETFs are down by more than their broader focused peers, due to commodity price falls, and concerns about bank profitability and overall credit markets. Finally, with Australia having an extra trading day than many global markets (also following a weekend) during the period, further falls on global ETFs are expected as the weekend’s Coronavirus and oil crash related news is digested by markets.

So what now? We’ve listed a few ideas below on how to survive the coronavirus melt down. None of these ideas involve the purchase of toilet paper in bulk, or should be considered investment advice.

Inverse ETFs

Inverse ETFs are those that increase in value as markets fall and decrease as markets rise, so are in effect the inverse of the index they track. Representing just $300m of Australia’s ETF market at the turn of the new year, they now represent over $500m, as investors use these tools to benefit from the market falls, or at least hedge some of their losses.

Without Inverse ETFs it is difficult for retail investors to “Short Sell” the market, with most tools available only to sophisticated and institutional investors. However inverse ETFs provide a simple way for retail investors to “Go Short”.

There’s three inverse ETFs available on the ASX, all provided by BetaShares. Their Australian Equities Bear fund (BEAR), and their Australian (BBOZ) and International (BBUS) Strong Bear funds, which provide leveraged exposure to inverse indexes. These funds have returned 22%, 54% and 51% since markets began to tumble.

Word of warning. Markets in volatile times can go up as quickly as they go down, so be careful not to get caught with your pants down if entering the world of inverse (particularly leveraged) ETFs.

Gold ETFs

Often a safe haven in volatile times, Gold has performed reasonably well over the last few weeks. Gold has been in a bull market for some time, up 37% in Australian dollars over the last year, so the 5% or so it has added since Coronavirus mayhem began is only a small addition to its overall rally. ETFS Physical Gold (GOLD) is the most popular Gold ETF on the ASX at over $1Bn in value. You can also get gold exposure with Perth Mint Gold (PMGOLD) or Australian dollar hedged Gold with BetaShares Gold Bullion ETF (QAU).

Absolute Return (Long/Short) ETFs and LICs

Absolute Return funds can be both Long and Short the share market, giving them some protection from market falls. Whilst these funds tend to underperform in the rising markets we’ve seen over the last couple of years, they can shine in falling and volatile markets if well managed. There’s 28 ETFs and LICs that we classify as Absolute Return (you can filter by Absolute Return in the fund search). The average fall to date is 12.5%, much less than the broader share market.

Nab a LIC at a discount to NAV

We’ve written over the last year or so about the discounts to Net Asset Value that many Listed Investment Companies (LICs) are currently trading at. Panic selling is only going to see those discounts widen, and we expect to see most of the market begin trading at deep discounts to NAV. Here’s an opportunity to pick up $1 worth of assets for $0.80 or less.

As LICs are only required to publish their NAV once a month (within 14 days of the end of the month), it’s a little too early to see where the large discounts are forming, but we’ll be sure to keep an eye on this space as the COVID-19 crash plays out.

Hold on for the ride

It’s boring advice that we’ve all heard before, but often the best thing to do in times of turmoil is close your eyes and hang on for the ride. It’s easier said than done when markets appear to be free falling, but time and time again markets recover, and those that hang on are better off than those who panic and sell at the bottom. We’ll be sticking to this strategy and hope to pick up some bargains and a few rolls of toilet paper along the way.

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