Various markets are chugging along after the recent hiccup. If we continue to experience some short-term volatility ahead, investors can utilize short or inverse exchange traded funds to hedge their positions.
Goldman Sachs has issued a warning on the corporate bond market, oil prices and the broader commodities space, reports Jenny Cosgrave for CNBC.
Specifically, Goldman analysts argue that oil prices could see a double dip and revisit the recent lows over the second half. [Energy ETF Investors Should Brace for ‘New Oil Order’]
“We still expect a decline in the oil price before it recovers, as the price is high relative to current and forecast fundamentals,” analysts led by Christian Mueller-Glissmann at the bank said in a research note. “The reaction of non-OPEC (the Organization of Petroleum Exporting Countries) producers remains limited so far and low-cost producers such as Saudi Arabia, Iraq and Russia are on track to grow production sharply.”
Consequently, ETF investors may be back to inverse options as a way to hedge or capitalize on the fall in oil. For instance, the United States Short Oil (NYSEArca: DNO) tracks the opposite moves of the West Texas Intermediate crude oil futures, DB Crude Oil Short ETN (NYSEArca: SZO) tracks the simple inverse of oil, ProShares UltraShort Bloomberg Crude Oil (NYSEArca: SCO) tries to reflect the two times inverse or -200% daily performance of WTI crude oil, DB Crude Oil Double Short ETN (NYSEArca: DTO) also follows a -200% performance of oil and VelocityShares 3x Inverse Crude (NYSEArca: DWTI) takes the three times inverse or -300% performance of crude oil. [Investors Capitalize on Oil Swings with Leveraged ETFs]
Additionally, Goldman advised clients to stay away from commodities for the rest of the year, with an underweight-rating on oil for the next 12-months.
Investors who want to capitalize on a continued fall in the broader commodities market can take a look at the ProShares UltraShort Bloomberg Commodity (NYSEArca: CMD), which takes the daily -2x or -200% performance of the Bloomberg Commodity Index. CMD includes a hefty tilt toward energy, with 8.3% natural gas, 8.1% Brent oil, 7.9% crude oil futures and 4.9% unleaded gas RBOB futures. However, potential traders should use limit orders to better control trades as the ETF shows relatively low activity. [Commodities ETFs Pullback on Strong USD, Overseas Weakness]
Additionally, the investment bank downgraded its outlook on corporate debt to “neutral” for the three months ahead, anticipating that the spread between government bond yields and corporate debt could narrow or yields to increase. For the year, the bank also remains bearish with an underweight outlook on credit.
Fixed-income investors can also hedge their corporate debt exposure with inverse high-yield and investment-grade corporate debt ETFs. For example, the ProShares Short High Yield ETF (NYSEArca: SJB) takes the inverse -1x or -100% daily performance of the Markit iBoxx $ Liquid High Yield Index, and the ProShares Short Investment Grade Corporate ETF (NYSEArca: IGS) tracks the -1x or -100% daily performance of the Markit iBoxx $ Liquid Investment Grade Index.
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Max Chen contributed to this article.