10 Black Swan Events (and the ETFs to Play Them)

by on July 23, 2014

A black swan event is one that is unprecedented and unexpected; they take swarms of people by surprise and have a pronounced impact. These can be both positive and negative events, though the term has become more associated with negativity. A number of these events have impacted the investing world over the years, creating a slight sense of anxiety, as nobody ever wants to be caught off guard for another occurrence like the Great Depression.

Below, we outlined 10 possible black swan scenarios that could unfold in the coming years, and ETFs to play each situation:

1. A Market Depression

The Great Depression was one of the most significant events in investing history, as it sent markets into a selling frenzy and evaporated the holdings and savings of nearly every citizen. Today, we have a number of circuit breakers and governing bodies in place to ensure that another depression will never happen, but that does not mean that it is impossible.

Should a depression ever strike again, there is no better ETF to own than the Daily 2x VIX Short-Term ETN (TVIX). This fund applies a 200% leverage to VIX futures, which spike anytime the market is taking a hit. Simply put, TVIX feeds off of recession and depression situations and is known to make big moves on a day-to-day basis. That being said, anyone who takes a bet on this fund and a market crash does not come to fruition, your position in this fund will take a major beating.

2. A Return to the Gold Standard

GoldThere are those who believe that we never should have abandoned the gold standard and others who continue to call for a return to this monetary system. Though it seems far fetched, given our addiction to money printing in recent years, it is still not an impossible scenario. Should the gold standard ever make a comeback, owning a slice of the pie is the best way to protect your portfolio (that and not owning any currency positions). The SPDR Gold Trust (GLD) invests in physical gold and presents itself as a perfect option for a move to a gold-backed currency.

3. Hyperinflation

Hyperinflation is runaway inflation that exponentially decreases the value of a currency. The most recent case afflicted Zimbabwe, which saw the country issuing bills as high as “One Hundred Trillion” just years ago. Though organizations like the Fed are in place to fight such a scenario, runaway inflation is a concern that some investors still have.

In such a case, it would be tough to justify owning much of anything, but the TIPS Bond ETF (TIP) is a great place to start. This fixed income ETF invests in inflation-protected T-bills, helping investors navigate the uncertain world of inflation.

4. World War III

Vanguard continues its ETF war against iSharesPolitical instability is an issue that will likely never disappear. Across the world there are numerous conflicts and issues between countries and within countries that can lead to violent affairs that can be a burden for markets. Choosing just one ETF for such a scenario is impossible without knowing who exactly is involved in the conflict. Luckily, there are a wide range of country specific ETFs to help you make a play, short or long, when the time comes. Take a look at our ETF Country Exposure tool to find the funds that allocate to various countries around the world.

5. Energy Breakthrough

For now, fossil fuels dominate our energy consumption and, quite frankly, keep the world spinning. But that has not stopped researchers from looking for the next big energy source to replace our reliance on a non-renewable resource. There have been plenty of contenders thus far, but none have been able to dethrone oil from its top spot.

Predicting what the next energy breakthrough will be is a tall order, but should there be one, you can bet that oil prices will take a major hit. In that case, the 3x Inverse Brent Crude ETN (DOIL) is the perfect fund. This ETN applies a -300% leverage to oil prices, meaning it will jump 3% for every 1% loss in the price of oil.

6. U.S. Debt Default

man's hand holds dollarsThe U.S. has been racking up quite a hefty debt pile in recent years, and has even had a few default scares along the way. Should China or any other major debtor decide it is time to collect (or should the U.S. default on its own debts), the dollar will be in for a downhill ride. In that case, the DB USD Index Bearish ETF (UDN) is perfectly suited to prey on a flailing dollar. UDN applies a -200% leverage to dollar futures and is designed to profit in times of a weak greenback.

7. Global Pandemic

Hollywood has taken this concept and run with it, but there are legitimate concerns about a widespread virus in today’s highly connected society. Though it would be extremely rare to see something surface as deadly as the Bubonic Plague, it is not an impossibility. In this case, finding a cure would be the first thing on everyone’s minds and a broad healthcare holding can help you take advantage of the first company that does, as its profit and stock will surely skyrocket. Alongside that, health care services in general will be in higher demand in order to try and keep people healthy for as long as possible.

The Health Care ETF (VHT) from Vanguard allocates to more than 300 companies in the sector, giving you the best chance of capturing the profits of the industry and whichever company is able to find a cure the fastest.

8. Internet Takedown

The recent “Heartbleed Virus” scare, among a number of other hacking attempts, has proven that the internet is not as secure of a location as was originally thought. The internet revolutionized the investing world by allowing everyone to make trades and conduct in-depth research from their own home. Should there ever be a world wide breach or attack that interrupts internet service on a large scale, even temporarily, the consequences would be devastating.

This scenario would be a feeding ground for the UltraPro Short QQQ (SQQQ), which applies a -300% leverage to the Nasdaq. The aforementioned index is mainly comprised of technology firms, the vast majority of which are extremely reliant on the internet and cloud based services to survive. The Nasdaq would take a massive hit and SQQQ would reap all of the rewards.

9. Technological Revolution

There have been a number of revolutions in the past that have advanced modern society overnight. Events like the industrial and agricultural revolutions were certainly black swan events that saw a major improvement in the global economy over a short period of time. Any kind of technological revolution will certainly send broad markets for a bull-run much to the delight of Wall Street. In that case, the UltraPro S&P 500 (UPRO) will be the fund to own, as it applies a 300% leverage to the S&P 500 index.

10. Chicago Cubs Win the World Series

We are based out of Chicago, and we can’t imagine any black swan event more unpredictable than the most depressing franchise in sports history actually winning a World Series. The Cubs have not won the big one since 1908, giving them the longest World Series drought of any MLB team. There are no ETFs to profit here because the world will likely end.

The Bottom Line

Black swan events are extremely unlikely to occur, but that doesn’t mean that they’re impossible. For the most part, investors should not spend their time worrying about lofty hypotheticals, but it never hurts to learn more about some of these scenarios in the rare case that one will actually unfold.

Follow me on Twitter @JaredCummans.

[For more ETF analysis, make sure to sign up for our free ETF newsletter]

Disclosure: No positions at time of writing.