Bearish ETF Strategies to Hedge Against the Fed Outlook | ETF Trends

As traders readjust for a more bearish outlook in the wake of the Federal Reserve’s hawkish stance, exchange traded fund investors could turn to inverse or short alternative strategies to hedge further market risks.

For instance, traders funneled $154.4 million into the ProShares Short S&P500 (SH), which takes a simple inverse or -100% daily performance of the S&P 500 index, in the previous session, the largest single-day inflow for the bearish ETF since April 2020, according to Bloomberg.

U.S. equities have retreated in the wake of a risk-off sentiment after Fed Chairman Jerome Powell’s speech at Jackson Hole, Wyoming on Friday where he warned that the central bank will continue to hike interest rates until inflation is properly under control, even at the cost of a potential economic recession.

“Federal Reserve speakers are stressing that the central bank will not pivot away from tightening anytime soon,” Quincy Krosby, chief global strategist at LPL Financial, told the Wall Street Journal. “The question now is how much pain the Fed will deliver, and how long it will take to bring down inflation. The market is trying to find an equilibrium with where stocks should be valued based on those expectations.”

Powell’s statement ended hopes of more modest rate hikes with an eventual pivot or end to monetary policy tightening, which would have signaled a turning point to the more downbeat market projections.

“It’s been a rough go since Chairman Powell’s speech at Jackson Hole, we had that huge down day and there was some maybe hope that maybe the market would stabilize a bit, but just every little bounce has been met with selling pressure,” Yung-Yu Ma, chief investment strategist at BMO Wealth Management, told Reuters.

“The market is kind of shifting back to the macro picture, which is now sort of recalibrated to the expectation of more Fed hawkishness and the idea that the economy could slow more than anticipated, even the question about corporate profits is back on the table.”

ETF traders who are looking to protect their portfolios from potential pullbacks ahead may consider some exposure to bearish or inverse ETFs to hedge against further falls.

Along with the ProShares Short S&P500 (SH), more aggressive traders can look to the leveraged options including the ProShares UltraShort S&P500 ETF (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 (SPXS), which takes -3x or -300% of the daily performance of the S&P 500, and the ProShares UltraPro Short S&P 500 ETF (SPXU), which also takes -300% of the daily performance of the S&P 500.

Those who want to hedge against risk in the Dow Jones Industrial Average can use inverse ETFs to bolster their long equities positions. The ProShares Short Dow 30 ETF (DOG) tries to reflect -100% of the daily performance of the Dow Jones Industrial Average. For more aggressive traders, the ProShares UltraShort Dow 30 ETF (DXD) takes the -200% of the Dow Jones, and the ProShares UltraPro Short Dow 30 (SDOW) reflects the -300% of the Dow.

Lastly, investors can also hedge against a dipping Nasdaq through bearish options as well. For instance, the ProShares Short QQQ ETF (PSQ) takes the inverse or -100% daily performance of the Nasdaq-100 Index. For the aggressive trader, the ProShares UltraShort QQQ ETF (QID) tracks the double inverse or -200% performance of the Nasdaq-100, and the ProShares UltraPro Short QQQ ETF (SQQQ) reflects the triple inverse or -300% of the Nasdaq-100.

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