Bear ETFs Heating Up in Volatile Markets

May 24th at 12:00pm by Tom Lydon

The market has been taking investors on a volatile ride. While many have been on a flight to quality toward gold, Treasury bond and Japanese yen exchange traded funds (ETFs), other intrepid investors are taking shelter in bear funds.

Bear funds are increasingly popular in the current market climate, thanks to increasingly negative investor sentiment. Jason Kephart for SmartMoney reports that these funds, which trade like stocks, use derivatives to make their prices rise when the broad market indexes they track fall. On the flip side, if the market goes up, these ETFs will go down. Case in point: last year when the market soared, they lost an average of 48%. [Why Leveraged ETFs Are in the Spotlight.]

We did a recent survey on our site that showed many of you have either used short ETFs already (42%) or have considered doing so (35%). These short and ultra short funds are leading the markets in recent days and months, too, and many of them are perched well above their 200-day moving average:

  • Market Vectors Double Short Euro ETN (NYSEArca: DRR) is up 41.4% in the last six months
  • ProShares UltraShort Euro (NYSEArca: EUO) is up 41.1% in the last six months
  • Direxion Developed Markets Bear 3x (NYSEArca: DPK) is up 25.3% in the last six months

Even so far today, you can get a real sense of how investors are feeling by taking a gander at the volume leaders: Direxion Daily Financial Bear (NYSEArca: FAZ), ProShares UltraShort S&P 500 (NYSEArca: SDS) and Direxion Daily Small Cap Bear 3x (NYSEArca: TZA).

Bear market ETFs are a safer way for investors to hedge their bets against a falling market. Shorting the old way (by using a margin account), you could have lost money indefinitely. With a bear fund, the ETF can only go as low as zero, even as the market soars, reports ETF Daily News. [How to Spice Up Your Portfolio With Leverage.]
As we always caution with leveraged and inverse ETFs, they’re not for everyone and they’re not mean for buy-and-hold use. The providers only guarantee that they will track their benchmarks on a daily basis. Hold them longer than that, and you may begin to see some divergence. That’s especially important to keep in mind in the current climate, since this effect is heightened in volatile markets. [Everything You Need to Know About Leveraged and Inverse ETFs.]
For more stories about long-short ETFs, visit our long-short ETF category.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.