Equity markets have corrected since their highs in October 2021, and investors have witnessed periods of heightened volatility induced by the Russia-Ukraine conflict, red-hot inflation, rising interest rates and monetary tightening.

Investors concerned about market downturns may find opportunities by investing in ETFs to navigate such bear markets.

While picking individual stocks may be risky, there are several ETFs geared toward withstanding bear markets, which may be suitable to an investor’s style and risk tolerance. ETFs have now become an easy and preferred route for many investors to take exposure to the stock market, by not only providing exposure to the broader market, but also allowing them to focus on specific sectors, themes, strategies, and styles as per their preference.

ETFs are a low-cost passive investment alternative for investors to take exposure to the equity markets.

Volatility tends to spike during times of market turmoil as a result of uncertainty regarding macroeconomic conditions. During such bear markets, investors may opt for Low-Volatility ETFs which tend to succeed in volatile market environments. Stocks that make up Low-Volatility ETFs are those with relatively lower volatility, thereby limiting downside risk during bear markets and cushioning portfolios.

Beta is a popular measure of volatility relative to the broader market, hence an ETF with low Beta stocks enable investors to maintain their equity exposure while reducing their exposure to the broader market’s volatility.

Dividend yielding stocks typically outperform in environments of elevated inflation, hence investors could do well in such environments by investing in ETFs with exposure to large cap stocks with higher dividend yields.

In previous bear markets, these ETFs have not only outperformed large caps but the broader market as well. Stocks which are part of such ETFs provide stable dividends and are often part of the defensive sectors, which are more likely to withstand economic downturns and heightened volatility compared to the cyclical sectors, thereby maximising yield and providing stability in portfolios.

Equal weighted large cap ETFs are another promising avenue for investments in bear markets, as large market declines are generally followed by a broad-based market rally, in which equal weighted ETFs have outperformed historically.

These ETFs offer exposure to large companies with an equal weight to each stock, thereby reducing stock and sector concentration risk. It provides an equal opportunity to the tail stocks of a market cap weighted index to perform and contribute to the return during a secular rally capitalising on broad based economic growth.

Since consumption is one of the central themes supporting India’s structural growth story, investors can seek shelter in a Consumption thematic ETFs as well. They provide investors with exposure to key sectors like consumer goods and services, automobile, textiles, telecom and healthcare services, and others which where demand is generally secular. India’s sizable young population, rising income levels, growing retail penetration, increasing demand for luxury/ branded products are all supportive of India’s consumption sector, with massive potential to grow further.

Moreover, from an investment perspective, Consumption thematic ETFs have outperformed broader market indices during periods of significant downturn, mitigating the downside risk and volatility.

The above-mentioned ETFs may help investors limit the downside in their portfolios along with the potential to outperform markets in a state of turmoil. However, some of them may underperform once markets start gaining momentum. Hence, they must be used tactically to complement the core portfolio which is aligned with the investor’s risk appetite and overall asset allocation. Investors should also avoid trying to time the market by trying to catch the peaks and bottoms of the market and continue regular deployment via the SIP route to benefit from the long-term compounding benefits of equity markets.