With the S&P 500 inching closer toward a bear market, exchange traded fund investors can still use short or bearish strategies to hedge further downside risks.
After dipping more than 2% Monday, the S&P 500 was around 16% below its all-time high from January 3 and 4% short of an official bear market as it stumps through its worst four-month start to a new year since 1939, Reuters reports.
Fueling the recent selling, the increasingly aggressive Federal Reserve monetary policy outlook, with a recent 50 basis point interest rate hike, has weighed on risk appetite to fight a four-decade high inflation level. Many have even warned that the Fed could be too zealous in its efforts to contain inflationary pressures and even trigger a recession.
Stock fund investors are also beginning to call it quits. According to Goldman Sachs data, U.S. equity mutual funds and exchange-traded funds suffered $37 billion in outflows for the past four weeks, the biggest four-week outflows since late 2018.
Looking ahead, analysts at Deutsche Bank in April warned of a recession along with a 20% decline in the S&P 500 over 2023. BofA Global Research strategists also cautioned of a “rate shock,” projecting the current decline in stocks to continue.
The bears are coming out. An American Association of Individual Investor’s survey of bearish sentiment was at 52.9% for the week ended May 4, compared to the average rating of 30.5%. Last month, BofA’s survey of fund managers also revealed optimism over global growth at an all-time low.
“The Fed has been as slow to respond to inflation as they’ve ever been, and that is leaving me seriously negative on equities,” David Wright, co-founder of $9.6 billion asset manager Sierra Investments, told Reuters.
ETF traders looking to protect their portfolios from potential pullbacks ahead may consider some exposure to bearish or inverse ETFs to hedge against further falls.
For example, 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 -2x or -200% of the daily performance of the S&P 500, the Direxion Daily S&P 500 Bear 3x Shares (NYSEArca: SPXS), which takes -3x or -300% of the daily performance of the S&P 500, and the ProShares UltraPro Short S&P 500 ETF (NYSEArca: SPXU), which also takes -300% of the daily performance of the S&P 500.
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