Short ETFs to Defend Against a Downslide

April 2nd at 6:00am by Tom Lydon

If you are one of the investors who think the market is overbought and that the latest stock rally is running on fumes, bearish exchange traded funds are an alternative to going back to cash. So-called bearish ETFs are also known as inverse or short funds.

“The S&P 500 returned 4.2% over the past decade on an annualized basis. That anemic return came with incredible ups and downs, while safer bonds offered a 5.7% return with substantially less volatility over the same period. At this point, the outlook for stocks has improved. The S&P 500 in early 2012 is trading at the same level it hit in 1999. Yet the underlying companies have grown considerably over the trailing decade. Profits in 2012 are expected to reach record levels,” Michael Rawson for Morningstar wrote.

Whether you are an active trader that has a short term horizon and don’t believe that the market has much upside for the next few weeks, or a conservative investor that wants downside portfolio protection, there are bearish ETFs to enhance ones strategy.

Jeff Reeves for InvestorPlace reports that inverse ETFs are not necessarily tracking an index, they are gaining value when the index goes down, or losing value when the index goes up. Here are three inverse ETFs to consider:

  • ProShares Short Dow 30 (NYSEArca: DOG) Playing the downside of the Dow Jones Industrial Average is the easiest way to hedge a broad market reversal. Basically, Dog goes u if the Dow goes down, and performance is not one to one after adding in expenses. [Two Uses for Inverse and Leveraged ETFs]
  • ProShares Short MSCI Emerging Markets(NYSEArca: EUM) This fund corresponds to the inverse movements of the MSCI Emerging Markets Index, the most popular emerging market index. [Best Emerging Market ETFs]
  • AdvisorShares Active Bear ETF (NYSEArca: HDGE) This funds strategy is to short sell domestic equities. So this is most certainly a bearish play on the market even if it’s not purely moving in opposite of an index like the aforementioned inverse ETFs. HDGE shorts investments under the advisement of Ranger Alternative Management, based on active management and research. Analysts are searching for the worst-performing stocks for this fund, implementing a bottom-up selection process. [Chart of the Day: Active Bear ETF]

Tisha Guerrero contributed to this article.

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.