With U.S. markets showing some chinks in the armor, investors can utilize inverse or short exchange traded funds to hedge against a bearish turn.
Some market observers point out that it has been over 1,200 days since the S&P 500 experienced a 10% or greater correction, reports John Melloy for CNBC.
For those who are wary of a potential pullback in the S&P 500 index, there are a number of bearish or inverse ETF options with varying levels of leveraged exposure to capitalize off a weakening S&P 500. The ProShares Short S&P500 (NYSEArca: SH) takes a simple inverse or -100% daily performance of the S&P 500 index. Alternatively, for the more aggressive trader, leveraged options include the ProShares UltraShort S&P500 ETF (NYSEArca: SDS), which tries to reflect the -2x or -200% daily performance of the S&P 500, the Direxion Daily S&P 500 Bear 3x Shares (NYSEArca: SPXS), which takes the -3x or -300% daily performance of the S&P 500, and ProShares UltraPro Short S&P 500 ETF (NYSEArca: SPXU), which also takes the -300% daily performance of the S&P 500. [Inverse S&P 500 ETF Ideas to Hedge a Correction]
Market participants are growing wary after a lackluster start to 2015, with poor earnings growth and a significant rally in 2014. According to a recent Investors Intelligence survey, 34.7% of polled strategists see a correction ahead, compared to 31% a week ago.
“I believe that the end of Fed QE (cannot be replaced by ECB QE in its influence) and growing possibility in my mind of a June rate hike, at the same time earnings growth is slowing, dramatically raises the risk of a stock market correction,” Peter Boockvar, strategist for The Lindsey Group, said in the article. “After six years into a bull market where valuations are very stretched, investors should be watching their back and not swinging for any fences anymore.”
Furthermore, looking at the fixed-income market, Bob Walters, who oversees the capital markets business for Quicken Loans, argues than an inverting yield curve could indicate a slowdown or recession could occur this year, reports Ron Insana for CNBC.
Specifically, the flattening yield curve usually occurs during a slowdown and invert during a recession where long-term rates are lower than short-term rates. The central bank typically hikes short-term rates to cool an overheating economy. Meanwhile, long-term bonds will see greater demand and yields fall as higher short-term rates help depress inflation expectations.
Alternatively, investors can also capitalize off the fall in the widely viewed Dow Jones Industrial Average through the ProShares Short Dow30 ETF (NYSEArca: DOG), which tries to reflect the -100% daily performance of the Dow Jones Industrial Average. For the more aggressive traders, the ProShares UltraShort Dow 30 ETF (NYSEArca: DXD) takes the -200% of the Dow Jones and the ProShares UltraPro Short Dow30 (NYSEArca: SDOW) reflects the -300% of the Dow. [Do You Know How Your Leveraged ETFs Work?]
Lastly, the ProShares Short QQQ ETF (NYSEArca: PSQ) takes the inverse or -100% daily performance of the Nasdaq-100 Index. For the aggressive trader, the ProShares UltraShort QQQ ETF (NYSEArca: QID) tracks the double inverse or -200% performance of the Nasdaq-100, and the ProShares UltraPro Short QQQ ETF (NasdaqGM: SQQQ) reflects the triple inverse or -300% of the Nasdaq-100.
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