In a down market, short exchange traded funds (ETFs) gain popularity, but they need to be used with caution and education.
ProShares UltraShort QQQ (QID) is one of the more popular ETFs of this kind and it tracks the Nasdaq 100, while returning twice its inverse performance. The ETF has $1 billion in assets, and returned 38.8% year-to-date, but it is against a -5.1% return over the past year, says Jesse Emspak for Investor’s Business Daily. It’s benefited from the decline of the Nasdaq, which is 2.3% below its Jan. 22 low.
Among the strongest of performers is the ProShares UltraShort Semiconductor (SSG) which has given investors 39.5% year-to-date, with a one-year return of 10.4%. The semiconductor industry has been ailing so far this year.
Investors should consider two things when considering short ETFs:
1) Markets tend to go up over the long run, so shorting ETFs are not a long-term investment.
2) There is a strict limit on the gain any short can make. The value of the index should not go below zero.
UltraShorts can make a bad day in a particular sector – this morning’s financials, for example – a good one for investors who hold short funds, says Will Swarts for Smart Money. ProShares says their Ultra funds family isn’t targeted to the "mom and pop investors."
But for sophisticated investors, ProShares Chief Executive Michael Sapir says they can be a great way to capitalize.
Making sector calls can work, but just be sure you have your exit strategy in place before you get involved. We watch the 200-day moving average and put an 8% stop-loss on each ETF.