Trading the current NASDAQ bear market using ETFs

The NASDAQ 100 Index (NDX) is in full rout. As of May 17th, the NDX is down over -23% year-to-date, entering its deepest drawdown and bear market since the dotcom bubble. Many of the NASDAQ's high-performing pandemic stocks of 2020 and 2021 suffered severe losses as the market priced in multiple interest rate increases from an increasingly hawkish Federal Reserve Committee.

However, the increased volatility still offers investors and traders of all dispositions a chance to make decent returns. For bullish or bearish, long-term, or short-term oriented investors alike, there exists a vast selection of ETFs out there that can be used to trade the index. Today, I'll be highlighting six ways to navigate the NASDAQ bear market, along with six ETFs I selected via the Trackinsight ETF screener that complement each strategy. 

Low-cost buy-and-hold

Investors bullish on the mega-cap growth stocks of the NASDAQ 100 over the long term could minimize their fees using the Invesco NASDAQ 100 ETF (QQQM). QQQM is the newer, less expensive version of QQQ, boasting a reduced expense ratio of just 0.15%. Although having a slightly higher bid-ask spread and lower assets under management (AUM), QQQM is sufficiently large and liquid enough for a passive, long-term, buy-and-hold investment. In terms of index funds, QQQM is definitely one of the more growth-oriented, albeit high-risk, investments out there. 

Options trading 

Covered calls, cash secured puts, LEAPS, iron condors, box spreads – options traders looking to profit off the high volatility of the Nasdaq 100 usually opt for the larger, more liquid Invesco NASDAQ 100 ETF (QQQ).QQQ has a well-developed options chain, which allows traders to get the best order execution. Although slightly more expensive than QQQM with a 0.20% expense ratio, the lower bid-ask spread of QQQ has gained a strong following among traders. The fund has been around for quite a long time now and has attracted billions in AUM. 

Going long with leverage

Ultra-bullish investors banking on another quick V-shaped NASDAQ 100 recovery often employ leverage to enhance their returns. While some use margin, others may use leveraged ETFs like the Proshares UltraPro QQQ ETF (TQQQ) as a short-term trading instrument. TQQQ offers 3x daily reset leverage to the returns of the NASDAQ 100. The key word here is “daily .”If held for more extended periods, TQQQ returns might be highly unpredictable due to how volatility decay and compounding affect returns. The fund also has a high expense ratio of 0.95%. 

Going short with leverage 

Conversely, investors feeling bearish about the NASDAQ 100's short-term prospects tend to take short positions, either using margin or put options. An alternative is using the inverse of TQQQ, which would be the Proshares UltraPro Short QQQ (SQQQ). This fund offers 3x daily inverse exposure to the NASDAQ 100. Like TQQQ, SQQQ poses many of the same risks and is not suitable as a long-term holding as indicated in the fund’s prospectus. Like TQQQ, SQQQ also has a high expense ratio of 0.95%. The fund also reverses splits frequently to maintain its share price. 

Selling covered calls

The current high-volatility, side-ways trading market conditions have significantly boosted the viability of a covered call strategy. Yield-hungry and income-oriented investors have increasingly turned to covered calls as bond prices plummeted and dividend stocks lost value. While investors can buy 100 shares of an ETF like QQQ to sell calls on, this approach is cost-prohibitive for those with a smaller account size. Another way to implement a covered call strategy is through the Global X Nasdaq 100 Covered Call ETF (QYLD). QYLD writes out-of-the-money (OTM) options on the NDX, pocketing a handsome premium for doing so. As of date, the 12-month trailing yield of the ETF stands at 15.55%. 

Implementing a collar

While covered calls can bring in significant income from the premiums, they do not protect the downside. If the underlying stocks or ETFs fall, investors are fully exposed to those losses. The use of a collar options strategy can mitigate that. ETFs like the Nationwide Risk-Managed Income ETF (NUSI) sell OTM calls and uses a portion of that premium to buy a protective put option. This limits both downside risk and upside return and reduces volatility. This makes NUSI a possible defensive hold during bear markets. NUSI currently has a 12-month trailing yield of 8.56%. 

Disclaimer: This article is limited to the dissemination of general information pertaining to investment strategies and financial planning and does not constitute an offer to issue or sell, or a solicitation of an offer to subscribe, buy, or acquire an interest in, any securities, financial instruments or other services, nor does it constitute a financial promotion, investment advice or an inducement or incitement to participate in any product, offering or investment.