Why ETFs are a wise choice in a bear market
ETFs have appealing features like a low cost compared to actively managed mutual funds
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Exchange-traded funds, or ETFs, offer you an opportunity to diversify your portfolio because they are a basket of securities in one wrapper, similar to a mutual fund. And, if you’ve never purchased an ETF, now can be a good time to try this type of lower-risk investment.
"If you have a long time horizon then a bear market can make a great entry point to buy a low-cost, well-diversified, index-based equity ETF," explained Todd Rosenbluth, head of research at VettaFi. "You will be buying at discount and have time to be patient for a market recovery."
In addition, said Rosenbluth, ETFs can be appealing during a bear market as they cost less than mutual funds.
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What is a "bear market?"
A bear market is a prolonged period of stock market price declines, typically by 20% or more from its most recent high, said Ashley Tran, Fidelity assistant branch manager in Tampa, Florida. Usually, investors track the decline of major indexes including the Dow Jones Industrial Average or S&P 500 to gauge bear market territory, she added.
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Why are ETFs good choices for a bear market?
Tran said it’s always a strategy to have a diversified investment portfolio to help lower your risk and build a well-balanced strategic asset allocation of stocks and bonds. In times of a bear market during an economic downturn, a majority of stocks and investments are directly impacted.
"Diversification can help protect your portfolio during times of market instability and would recommend considering adding ETFs to your asset mix," she said.
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Why should you consider ETFs in a bear market?
ETFs have appealing features and advantages for long-term investors, explained Tran, including diversification, a low cost compared to actively managed mutual funds, easy and accessible trading as well as transparency – as it tracks an index, it's relatively easy to know exactly what you own.
"As bear markets don’t tend to last very long, it’s important to think of your long-term saving strategy and create a diversified portfolio by buying index funds or other diversified investments," Tran said.