U.S. Markets open in 6 hrs 4 mins

7 Inverse ETFs to Play Election Uncertainty

Sanghamitra Saha

Not only America, but the whole world has caught U.S. presidential election fever, with just one day left to Election Day. Democratic candidate Clinton’s prolonged lead over Republican candidate Trump has narrowed within the final week. Polls in favor of Clinton are now 45.3% whereas the same for Trump are 43%, as per the national polling average published on nytimes.

The nail-biting contest was best reflected in the markets, with the S&P 500 losing for nine sessions in row – its longest retreating stretch since December 1980. The Nasdaq's nine-day fall is the lengthiest since 1984. Moreover, heightened bets over policy tightening in December and fears of a cease in cheap money inflows hurt U.S. equities (read: 9 ETF Ways to Guard Against S&P 500's Losing Streak).

Well, investing uncertainty is common before such a big-scale economic event. Studies show that historically “the economic policy uncertainty index” has always peaked around the election and settled down once investors got cues about the economic policies to implemented. True to tradition, volatility flared up, with iPath S&P 500 VIX ST Futures ETN VXX adding over 20% in the last 10 trading sessions (as of November 4, 2016) (read: 4 ETFs to Hedge Your Portfolio Before Presidential Election).

The P/E ratio of the S&P has also behaved in a similar fashion, slumping ahead of election and surging within six months of the final results. The perceived credit risk of U.S. companies jumped before election but the dust settled down in around nine months, as per an article published in The Wall Street Journal.

So, with Clinton and Trump having diverse points of view on a host of issues, it’s natural for the markets to remain rocky. The Wall Street Journal went on to explain why the market does not calm down just after the election. This is because Q4 GDP and all other U.S. economic data will reflect the election-induced unsteadiness and does not speak of the true health of the economy. So, to understand where we stand now economically, it will take some more time as the investing world takes pretty long to get over the election trauma.

Short Stocks?

Given this, stocks may undergo a selling pressure and investors could easily tap this opportune moment by going short on various global equity indices. There are a number of inverse or leveraged inverse products in the market that offer inverse (opposite) exposure to such indices. Below we highlight those and some of the key differences between each (read: ETF Strategies to Gain from in the Rest of 2016):

Short U.S. Stocks

ProShares Short S&P500 ETF SH

This fund provides unleveraged inverse exposure to the daily performance of the S&P 500 index.

ProShares UltraShort S&P500 ETF SDS

This fund seeks two times (2x) leveraged inverse exposure to the index.

ProShares UltraPro Short S&P500 SPXU)

Investors having a more bearish view and higher risk appetite could find SPXU interesting as the fund provides three times (3x) inverse exposure to the index.

ProShares Short QQQ PSQ

It offers inverse unleveraged exposure to the NASDAQ-100 Index.

ProShares Short Dow30 DOG

It offers inverse unleveraged exposure to the Dow Jones Industrial Average Index.

ProShares Short Financials SEF">(SEF

This fund provides unleveraged inverse exposure to the daily performance of the Dow Jones U.S. Financials Index.

Short EAFE (Europe, Australasia and Far East)

ProShares Short MSCI EAFE (EFZ)

This fund provides inverse exposure to the daily performance of the MSCI EAFE Index.

Bottom Line

As a caveat, investors should note that such products are suitable only for short-term traders as these are rebalanced on a daily basis. Still, for ETF investors who are bearish on the equity market for now, a near-term short could be intriguing for those with a high level of risk tolerance (see: all the Inverse Equity ETFs here).