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2 ways to profit from the ASX dropping

The markets are a sea of red today, with the S&P/ASX 200 (INDEXASX: XJO) index down 2.4% at the time of writing. This follows the Dow Jones dropping more than 800 points over in the US overnight – its fourth largest one-day drop in history!

Many of us will be watching our portfolio balances with a sinking heart (or at least trying not to). But there are certain ways that investors can profit from a falling stock market. Here are two that are common ‘hedging’ strategies.

Buying gold

Gold is the ultimate safe haven asset, and investors seem to flock to it at any signs of trouble these days. Now before you get too hung up on the pros and cons of storing gold bars under your bed, consider the ETFS Physical Gold ETF (ASX: GOLD) instead. Buying units of this exchange traded fund (ETF) is the equivalent of buying a stake in physical gold bullion, which this ETF stores in a London bank vault.

You could also consider a gold mining company like Newcrest Mining Ltd (ASX: NCM). This is a slightly riskier option, but remember that mining companies own the gold that their mines hold (and Newcrest owns over $120 billion worth of gold at current prices). If you want something close to proof, Newcrest shares (along with the other gold miners) are up nearly 1% today despite the market carnage.

Inverse ETFs

Like the name suggests, there are ETFs out there that rise in value when the market falls. Take the BetaShares Australian Equities Strong Bear Hedge Fund (ASX: BBOZ) for instance. According to BetaShares, this ETF is designed so “a 1% fall in the Australian share market on a given day can generally be expected to deliver a 2.0% to 2.75% increase in the value of the Fund (and vice versa)”.

ETFs such as this use leverage and short-selling to achieve this result – making them very risky vehicles to be playing with. But BBOZ is up 6% today alone, so it might be worth the risk if you’re feeling crazy-brave.

Foolish takeaway

Both of these strategies can work if you use them correctly, but as a long-term investor, I personally just accept that share market fluctuations are part of the deal and try to buy more in these situations. If I had to pick, I would choose gold as a hedging route as I appreciate the underlying value of the yellow metal – Inverse ETFs are a little exotic for me personally.

I'd just prefer to stick with quality, blue-chip companies like these here!

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Motley Fool contributor Sebastian Bowen 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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