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This unusual strategy could be the 'sweet spot' for investors in a wild market

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U.S. Treasury yields rose Monday after a difficult week for stocks and bonds, which on Wednesday sent what many see as a recession signal when the spread between the 2-year and 10-year Treasury yields inverted.

The move roiled markets, sending the Dow Jones Industrial Average down 800 points that day, but the pain didn't last. Stocks mounted a two-day rebound Friday and Monday, and bond yields appeared to bottom as investors' fears subsided.

Now, with recession fears still simmering and Treasury yields still low, one expert is recommending using exchange-traded funds to employ a somewhat unusual strategy.

"With all of the things that are available to you right now, something out there in the agency space is probably the sweet spot," Dave Nadig, managing director of ETF.com, said Monday on CNBC's "ETF Edge."

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IShares' mortgage-backed-securities-based ETF, which trades as iShares MBS ETF under the ticker MBB, was the sweetest of the sweet for Nadig.

With a cost of 7 basis points, a roughly 2.5% yield, a three-to-four-year investment duration and the "implicit federal guarantee" for mortgage-backed securities intact, Nadig argues that investors would be hard-pressed to find a better high-yielding bet in the ETF space.

"That's looking pretty good versus what else you can get in raw fixed income right now," he said. "Honestly, the yields there for the risk you're taking really do seem like that sweet spot for most investors."

For those who are particularly nervous about a potential recession, John Davi, founder and chief investment officer of Astoria Portfolio Advisors, suggested a different kind of trade.

AGFiQ's U.S. Market Neutral Anti-Beta Fund, ticker BTAL, has climbed nearly 9% in the last month and could be just the ticket for those looking to hedge against a swing-prone market, Davi said Monday in the same "ETF Edge" interview.

"The ETF goes long low-beta stocks and it shorts high-beta stocks," he said, using a metric that measures a stock's potential for volatility. "So, in risk-off periods, BTAL will outperform and it'll be inversely correlated with the S&P [500]."

The correlation runs at negative 70%, forming something of a mirror-image pattern. But that doesn't mean that BTAL's gains vanish when the S&P rallies, Nadig said.

"If you're nervous about getting more into equities, or maybe you went to cash — congratulations — and you managed to avoid all [of] the downturn, this is a great way to leg back in because ... there's some long equity exposure here," Nadig said. "If you look over the last year, for instance, the S&P was up 8%. It's not that this went down 8%. This was actually up 30% because it managed to have those negative bets in the right place at the right time."

All in all, with some, including Nadig, worried that we're already in an earnings recession, BTAL could be the hedge investors need to stick out the volatility heading into 2020, said Davi, whose fund is recommending 10% exposure to BTAL in its clients' stock portfolios.

"Until there's some stability in the bond market, I think you want to stay risk-off, and BTAL will hedge your downside risk and give you a little bit of upside participation," Davi said.

Both MBB and BTAL fell by less than 1% on Monday.

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