ETF STRATEGIES FOR A BEAR MARKET: PART I — USING SHORT ETFS
There’s no doubt about, this market has been hammered over the past several months. Even the big spike in stocks today is largely a result of frustrated investors who are looking to capitalize on even the slightest hint of positive news after a prolonged downtrend. In my opinion, until we see a sustained period of buying in the market such as we’ve seen today, the scale is still firmly tipped toward the bears.
Given this market’s slant toward sellers, many people are struggling with just how best to manage their money. Well, if you are one of those struggling here with this market, don’t worry. In this first of a five-part series, we’ll explore using "short" ETFs to collect profits when the market is heading south.
The first key to dealing with a bear market is to have the tools at your disposal that can help you make money when stocks are selling off. That means using short or bear-market ETFs that rise when the value of their underlying indexes fall.
Fortunately, we now have many short ETFs to choose from, and they’ve been brought to us by ProShares. These short ETFs are designed to move in the opposite direction of their respective indices. For example, the ProShares Short S&P 500 (SH) is designed to move higher when the S&P 500 falls. That means if the S&P 500 index loses 2%, then SH will gain 2%.
For more aggressive investors, ProShares now offers leveraged bear funds, which move twice the inverse of their underlying indices. For example, the ProShares Ultra Short S&P 500 (SDS) is designed to move higher when the S&P 500 index falls — only at twice the rate! So, if the S&P 500 falls 2%, SDS will gain 4%.
Tools like these can really give investors the ability to profit from adverse market conditions. But the key here is to have the proper strategy in place for using these funds. Because shorting the market can be a very tricky proposition, you have to be on top of the markets literally every hour. You have to set sell points, watch charts, watch volume data, look at macro-economic developments, et cetera.
Yes, there is a lot to investing with bear ETFs, especially the leveraged bear ETFs that can really turn on you fast if you’re not careful. But if you have the right advisor helping you navigate through all of this data, the job becomes a whole lot easier.
Right now we are using short ETFs in both our Successful Investing and ETF Trader services. One service is a bit more conservative than the other when employing short funds, but the basic theory behind their use remains the same.
For more on how you can make short ETFs work in your investment portfolio, I invite you to check out both my Successful Investing and ETF Trader services.
Jim Woods is a 30-plus-year veteran of the markets with varied experience as a broker, hedge fund trader, financial writer, author and newsletter editor.
His books include co-authoring, “Billion Dollar Green: Profit from the Eco Revolution,” and “The Wealth Shield: How to Invest and Protect Your Money from Another Stock Market Crash, Financial Crisis or Global Economic Collapse.” He’s also ghostwritten many books and articles, as well as edited content for some of the investment industry’s biggest luminaries. Read more about Jim Woods.
