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3 ETFs that could help hedge against a market downturn

If you are a retail investor like myself, you will know that our investment options are limited compared to those available to institutional investors. This makes it difficult to properly diversify your portfolio and hedge against downside risks.

However, there are 3 quality ETFs, which you can use to diversify your stock portfolio if you’re feeling pessimistic about the outlook of the Australian stock market.

SPDR S&P/ASX Australian Government Bond Fund (ASX: GOVT)

One limitation of being a retail investor is we typically cannot invest directly into corporate or government bonds. However, there is a range of ETFs (exchange-traded funds) available to the everyday investor, which mimic the returns of bonds.

The SPDR S&P/ASX Australian Government Bond Fund (listed as SPDR GOVT/ETF on Google Finance) closely tracks the S&P/ASX Government Bond Index, which includes all securities within the Commonwealth Government Bond and State Government Bond indices. This fund charges a management fee of 0.22% and has a current yield of 3.7% p.a.

This ETF is a great option if you want to reduce the overall risk of your portfolio and provide a cushion against a potential market downturn. If the stock market does happen to fall significantly, many investors will likely shift their funds into low-risk assets like government bonds due to the safety of their principal and periodic coupon payments, which would be beneficial for the returns of this fund.

ETFS Physical Gold (ASX: GOLD)

As a retail investor it can also be difficult, or at least impractical, to invest into commodities like silver and gold, both directly and through the use of derivatives. However, the ETFS Physical Gold ETF allows investors to gain exposure to the gold market.

The ETFS Physical Gold fund provides investors with a return that is equivalent to movements in the gold spot price (less fees). The fund holds physical gold bullion within vaults in London; therefore, each share of the ETF represents a beneficial interest in this physical gold. The fund charges a management fee of 0.40% and has returned -0.06% over the last 12 months.

This fund is a great way to get exposure to gold. If you are feeling bearish about the ASX, it could be worth buying some shares in this ETF. Investors will often flock to ‘safe haven’ assets like gold when there is uncertainty in the economy because gold is seen as a good store of value due to its durability and scarcity. Therefore, in a bear market, ETFS Physical Gold should outperform the stock market, making it a good way to reduce the downside risk of your portfolio.

BetaShares Australian Equities Bear Hedge Fund (ASX: BEAR)

Another limitation of being a retail investor is we are generally unable to hold short positions, or in other words, we are unable ‘bet against’ the sharemarket and profit from falling stock prices. However, the BetaShares Australian Equities Bear Hedge Fund ETF provides investors with a simple way to profit from (and protect against) a declining Australian sharemarket.

The BetaShares Australian Equities Bear Hedge Fund (listed as BETA BEAR/ETF on Google Finance) is an actively managed ETF, which is negatively correlated to the ASX200 index, meaning when there is a 1% fall in the Australian sharemarket, the fund can be expected to generate a positive return of roughly 1%. The fund charges management fees of 1.38% p.a. and has returned -10.5% over the last 12 months, due to positive sharemarket returns in this period.

If you are feeling pessimistic about the Australian economy and think the sharemarket is about to crash, this ETF is probably perfect for you. It is also a good way to hedge your Australian equities portfolio against falling markets and to manage your overall downside risk.

Foolish Takeaway

If you think the Australian sharemarket is overpriced and destined for a crash sometime soon, investing in these 3 ETFs is a simple and effective way for to diversify your portfolio and protect it against a contracting economy and falling equity values.

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Motley Fool contributor Gregory Burke has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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