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These 5 ETFs are perfect for the bears

The bears need to do something with their money, too. And that's where the following five ETFs could come into play.

These are the ETFs that have the largest negative relationship with the S&P 500. In other words, when the S&P 500 rises, these are the products that tend to fall the most — excluding ETFs that are smaller than $500 million in market cap, that are inversely related to another asset or that derive their value from a derivative product.

Perhaps unsurprisingly, the ETFs that this screen calls up come in two flavors — bonds and gold.


ETF
Beta (3-year)
YTD Performance
Vanguard Extended Duration Treasury Index Fund -0.4 8%
iShares 20+ Year Treasury Bond ETF -0.3 6%
Market Vectors Junior Gold Miners ETF -0.3 80%
Vanguard Long-Term Government Bond Index Fund -0.3 5%
iShares Gold Trust -0.2 17%

The ETF with the most significantly negative five-year beta (a measure of responsiveness to market moves) is the Vanguard Extended Duration Treasury ETF (EDV), which tracks the performance of long-dated Treasury bonds, and should fall dramatically as interest rates rise. In part because rising interest rates have tended to be met by rising stock prices, this product could be expected to rise 0.4 percent for every percentage point that stocks fall, based on its performance over the past three years.

Joining the extended duration ETF on the list are the iShares 20+ year Treasury ETF (TLT) and theVanguard Long-Term Government Bond Index ETF (VGLT), which have a similar, if less dramatic, relationship with stocks.

Rounding out the list are two gold products: The iShares Gold Trust (IAU), which is designed to track the price of gold, and the Market Vectors Junior Gold Miners ETF (GDXJ), which tracks the smaller and thus more volatile mining stocks.

"If you believe the equity markets are going to go down, and if you believe the overall financial system is going to go into a disruptive stage, these kind of securities perhaps could hedge you from that risk," Stifel Nicolaus portfolio manager Chad Morganlander said Monday on CNBC's "Trading Nation."

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Indeed, the word "hedge" is key. These products' negative correlations with stocks don't necessarily mean they can't be logically held in the same portfolio as an S&P 500 tracking product like the SPY. Rather, holding the ETFs alongside stocks may grant diversification benefits, insofar as they reduce potential downside more than they cut into potential upside.

While these products might be most comfortably held by the bears, then, even stock market bulls might consider taking them for a spin.

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Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Brian Sullivan

Brian Sullivan is co-anchor of CNBC's "Power Lunch" (M-F,1PM-3PM ET), one of the network's longest running programs, as well as the host of the daily investing program "Trading Nation." He is also a frequent guest on MSNBC's "Morning Joe" and other NBC properties.

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