Long-short exchange traded funds (ETFs) are attracting more interest than ever it seems, especially on days such as this one where the markets are poised to break through new lows. Investors still want to earn money, even when the market is tanking, and leveraged funds give them the opportunity to do so.
In rough markets, the ability to go short or long either 200% or 300% of an index’s daily value can prove to be a useful trading tool. But these types of funds should be used with caution, as with any investment, since they amplify market movements. In these times of higher volatility, that means big swings one way or the other than can catch an investor off guard if they aren’t paying attention.
It seems like for most of this year, long and short funds have been perched at the top in terms of daily performance. They can also give a quick snapshot of what sectors are feeling pain and how the markets are doing in general. Seeing a cluster of shorts sitting at the top of a list of funds ranked by daily, weekly or monthly returns tells you that the markets are hurting right now.
For the last five trading days, among the funds at the top are:
- Rydex Inverse 2x S&P Select Sector Financial (RFN)
- ProShares UltraShort Financials (SKF)
- ProShares UltraShort Real Estate (SRS)
- ProShares UltraShort SmallCap 600 (SDD)
- Rydex Inverse 2x Russell 2000 (RRZ)
Not all funds are right for every investor, so investors need to decide what is right and what works for them while using caution, and supplementing that with some education and research. If you think these funds might be right for you, do a gut check and make sure your risk profile fits.
We advocate sticking to a strategy of considering only those funds that are above their long-term trend lines (the 200-day moving average). Once they fall below that mark or 8% off the high, it’s time to let it go.
Read the disclosure, as Tom Lydon is a board member of Rydex Funds.