Consider Bearish ETF Strategies to Hedge Against Weak Earnings Results

As the earnings season begins, ETF investors should keep in mind that the upcoming quarterly results may come up short compared to what we have been accustomed to.

Due to the uncertainty over trade wars and global growth, a large number of U.S. companies have lowered their second-quarter earnings projections. Of the 114 companies that have issued earnings guidance for the period, 77% have warned of negative forecasts, CNBC reported.

As of result of the warnings, analysts have estimated an earnings decline of 2.9% year-over-year in the second quarter. If the estimate for a decline holds up, it would mark the first time the S&P 500 reported two straight quarters of year-over-year earnings declines in three years.

“That says it all about the trajectory now of earnings,” Peter Boockvar, chief investment officer of Bleakley Advisory Group, told CNBC.

Fastenal was among the first to provide investors a hint of what tariffs have done to corporate profits. The largest fastener distributor in North America revealed in its second-quarter earnings report that the trade war has damaged its business and outlined the difficulty of counteracting the losses.

“While we successfully raised prices as one element of our strategy to offset tariffs placed to date on products sourced from China, those increases were not sufficient to also counter general inflation in the marketplace,” Fastenal said in a note.

Among the various sectors, materials and information technology are expected to be the biggest year-over-year losers.

“With about two months past the recent tariff round, we expect to hear more details on the impact from companies this earnings season,” Bank of America equity and quant strategist, Savita Subramanian, said in a note.

As we head to an uncertain earnings season, traders who are looking to protect their portfolios from potential pullbacks in a near perfectly priced market 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 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.

Those who want to hedge against risk in the Dow Jones Industrial Average utilized inverse ETFs to bolster their long equities positions. The ProShares Short Dow 30 ETF (NYSEArca: DOG) 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 Dow 30 (NYSEArca: SDOW) reflects the -300% of the Dow.

Lastly, investors also hedged against a dipping Nasdaq through bearish options as well. For instance, 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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