Bearish Short ETFs for a Pullback in Stocks

ETF Trends

The stock market reached a new five-year high to kick off February, however, some investors may not be convinced fundamentals are in place for a full recovery yet. Various exchange traded funds can protect a portfolio in the event of a downturn in certain areas of the market.

“The markets have shown strong gains to start the year, but don’t be surprised to see a little anxiety creep in as a potential Congressional sequester looms,” says Randy Frederick, Managing Director of Active Trading & Derivatives at Charles Schwab.

“Flows were driven by international-stock ETFs, where diversified emerging-markets funds have been particularly strong, averaging a record $6 billion over the past two months. Flows into sector stock ETFs picked up in January allowing financial and real estate sector ETF assets to hit record levels. Flows into U.S. stock ETFs moderated somewhat. It appeared that in January, traders pulled money out of SPDR S&P 500 (SPY)  that had gone into that fund in December,” Michael Rawson wrote for Morningstar. [Stock ETFs and the January Barometer]

The following ETFs track the inverse of the broad-market indices, the S&P 500 and the Dow Jones Industrial Average. Both indices are used to measure the overall health of the U.S. economy and the performance of U.S. domiciled companies. Should the U.S. stock market take a downturn, the leveraged ETF profits on this action, rather than the gain. Ryan C. Fuhrmann for Investopedia suggests the following leveraged ETFs.  [ETF Chart of the Day: Shorting Large-Cap US Stocks]

  • ProShares Short S&P 500 (SH) $1.6 billion in AUM; expense ratio 0.89%
  • ProShares Short Dow 30 (DOG) A price-weighted index that measures the 30 largest companies in the U.S.  Expense ratio is 0.95%.

The next ETF tracks the inverse of the most popular developed international markets, or the MSCI EAFE Index. The ETF has $100 million in assets under management and costs 0.95%. ProShares Short MSCI EAFE (EFZ) would rally if global growth dropped off or if the Eurozone debt woes came back into focus.

The ProShares Short High Yield (SJB) tracks the junk bond, or high yield bond market through the index Markit iBoxx $ Liquid High Yield Index. The recent rally in the junk bond market had been strong in 2012, however, critics claim that this could end in the near-future.[Short ETFs to Defend Against a Downside]

Lastly, ProShares UltraShort Gold (GLL) allows investors to bet against the most talked about precious metal, gold. Gold prices have risen substantially over the past 10 years and this safe haven precious metal rallied through most of the recession and through the Eurozone debt crisis. The ETF would benefit from a shift out of gold and safe haven assets and back into equities. [Chart of the Day: Shorting Gold ETFs]

It is important to note that leveraged ETFs are not intended for a buy-and-hold strategy. They must be monitored daily, perhaps even throughout the day.

ProShares Short S&P 500

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SH, DOG, SPY, EFZ, SJB, GLL, Gold, High-Yield Bonds, Long-Short ETFs, Gold

Leveraged ETFs

 

Tisha Guerrero contributed to this article.

Full disclosure: Tom Lydon’s clients own SPY.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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