May’s volatility due to the U.S.-China trade wars showed that it’s profitable to be a bear using inverse exchange-traded funds (ETFs) as equity ETF outflows reached $19 billion based on a recent report by State Street Global Advisors. Inverse ETFs present the experienced investor with an alternative for gains that safe haven assets like bonds simply cannot provide.
“The current economic environment presents challenges for investors trying to manage their portfolios,” wrote Leks Gerlak, Investment Strategist at ProShares. “Timing the market can be challenging, especially during periods of volatility. Investors may find themselves selling in a down market, only to see a sharp rebound, such as what we saw from Q4 2018 to Q1 2019. And given that this bull market is now 10 years old, investors may not want to sell large equity positions and potentially incur capital gains taxes. Moving to bonds has historically been effective, but with yields already so low, this option may be less appealing.”
For investors who want to be a bear and take advantage of inverse ETFs, but have low trading capital, consider these alternatives:
ProShares Short S&P 500 (NYSEArca: SH): SH seeks daily results that correspond to the inverse (-1x) of the daily performance of the S&P 500 Index. The S&P 500 is a float-adjusted, market capitalization-weighted index of 500 U.S. operating companies and real estate investment trusts selected through a process that factors in criteria such as liquidity, price, market capitalization and financial viability.
ProShares UltraPro Short QQQ ETF (NasdaqGM: SQQQ): seeks daily investment results, before fees and expenses, that correspond to three times the inverse (-3x) of the daily performance of the NASDAQ-100 Index®. The fund invests in financial instruments that ProShare Advisors believes, in combination, should produce daily returns consistent with the fund’s investment objective. The index includes 100 of the largest domestic and international non-financial companies listed on The Nasdaq Stock Market based on market capitalization.
ProShares Short Russell2000 (NYSEArca: RWM): seeks daily investment results that correspond to the inverse (-1x) of the daily performance of the Russell 2000® Index. The fund invests in financial instruments that ProShare Advisors believes, in combination, should produce daily returns consistent with the fund’s investment objective. It is a float-adjusted, market capitalization-weighted index containing approximately 2000 of the smallest companies in the Russell 3000® Index or approximately 8% of the total market capitalization of the Russell 3000® Index, which in turn represents approximately 98% of the investable U.S. equity market.
“Hedging with inverse ETFs is a flexible strategy that can be invaluable during an uncertain market environment. Inverse ETFs are designed to move in the opposite direction of their benchmark (e.g. -1x) on a daily basis,” added Gerlak. “There are a range of strategies that can be used to hedge different types of exposure—from broad-based S&P 500 exposure to single countries and sectors, and even across asset classes. Keep in mind you may need cash on hand, or to raise cash, to invest in inverse ETFs.”
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