A way to profit from a decline
Inverse or “short” ETFs are exchange-traded products that allow you to profit when a certain investment class declines in value. These sophisticated instruments can be very risky, however. They tend to carry higher fees and are typically recommended only as short-term or relatively small holdings in a larger portfolio. That said, there are many inverse ETFs to consider for investors worried about hedging risk in this uncertain environment — or even turning a quick profit if things turn ugly. Here are several inverse ETFs you can add to your portfolio if you feel they fit with your investment strategy despite the risk.
ProShares Short S&P 500 (ticker: SH)
The largest inverse fund by value with nearly $4 billion in assets, SH is a common hedging vehicle for investors because it strives to deliver the inverse performance of a widely watched index, the S&P 500. In other words, if you’re concerned about the stock market falling, then this fund that moves opposite the largest 500 U.S. corporations is the simplest way to protect yourself.
ProShares Short Oil & Gas ETF (DDG)
Of course, not all the large U.S. stocks are built the same. And not all U.S. stocks are struggling right now. But one sector that has been particularly hard hit is energy, as oil has crashed to the low $20 range and erased the profitability of many exploration and production companies. Those who staked out a claim in DDG at the start of 2020 not only avoided the pain of the stock market crash, but also have booked roughly 45% gains since Jan. 1.
MicroSectors FANG+ Index Inverse ETN (GNAF)
If you are more focused on simply playing the biggest and fastest-moving technology stocks, consider this inverse FANG fund — that is, a fund that bets against Facebook (FB), Amazon.com (AMZN), Netflix (NFLX) and Google (GOOG, GOOGL), among other fashionable names. Some of these mega-cap tech stocks have held strong amid the coronavirus downturn, but if you want a hedge on these widely held stocks, then the clever ticker of inverse fund GNAF is one to remember.
ProShares Short High Yield (SJB)
Another area many investors have staked a claim on in recent years is high-yield or junk bonds. This class consists of debt offerings floated by companies in distressed situations, such as troubled retailers or shrinking industrial companies — and as a result of that troubled history, investors demand higher interest rates in exchange for higher risk. High-yield bonds have run into a lot of trouble lately as a tough economic environment has put these already iffy borrowers in a bind. As a result, SJB has moved higher as it is positioned on the opposite of this trade.
Direxion Daily 20+ Year Treasury Bear 1X Shares (TYBS)
As the Federal Reserve has slashed interest rates, longer-term government bonds have risen sharply in value because new bonds at these lower rates are simply not as attractive as older bonds that pay investors more. But for investors worried this trend may reverse, TYBS offers a hedge against this trend changing direction in the future.
Invesco DB US Dollar Index Bearish Fund (UDN)
A related strategy is to bet against the U.S. dollar instead of betting against Treasury bonds. Now, that is not to say that America’s currency will become worthless — simply that the greenback may fall out of favor when measured versus a basket of peers such as the Japanese yen, the Swiss franc and the euro. Given the record government spending after the $2 trillion CARES Act, it’s not unreasonable to expect global investors to think U.S. currency is less secure going forward.
ProShares Short MSCI Emerging Markets (EUM)
A fund that has utility both as a short-term tactical bet based on headlines as well as a longer-term hedge, this ProShares fund is centered on moving opposite of key emerging market stocks. Specifically, EUM is benchmarked to an MSCI index that spans 26 nations, led by China and South Korea. Holding this inverse ETF allows investors to bet against these regions while still allowing bullish investors to bet on U.S. stocks.
Direxion Daily CSI 300 China A Share Bear 1X Shares (CHAD)
If you are particularly bearish on the emerging market of China, then the CHAD inverse ETF allows you to take the opposite side of the trade on an index of 300 China “A share” corporations. That means these are not U.S. listed stocks or indirect plays in Taiwan or Singapore, but rather on-shore Chinese companies. If you want to bet against China, this fund is perhaps the purest way to do so.
ProShares Short MSCI EAFE (EFZ)
If you’d rather think bigger than emerging markets or China, then this EAFE fund could be the right inverse ETF for you. The acronym stands for Europe, Australasia and the Far East, and this fund wraps up more than 900 companies, including those you may recognize, like Swiss consumer giant Nestle (NSRGY), as well as those you may not, like Hong Kong-based financial giant AIA Group. The twist, of course, is that EFZ bets against these stocks so you can profit if they lose ground.
AdvisorShares Ranger Equity Bear ETF (HDGE)
If you can’t decide which flavor of inverse ETF is right for you, consider this more actively managed fund that makes strategic bets against stocks that its advisors feel are in a bad spot right now. That includes online furniture retailer Wayfair (W) and crowdsourcing financial firm LendingClub Corp. (LC). The risk, of course, is two-fold — first, that the market trends higher and it’s hard for this kind of inverse strategy to pay off, and second, that the managers pick the wrong stocks. But for investors who don’t prefer a one-size-fits-all approach, HDGE is an interesting alternative.
Inverse ETFs to buy to bet against the market:
— ProShares Short S&P 500 (SH)
— ProShares Short Oil & Gas ETF (DDG)
— MicroSectors FANG+ Index Inverse ETN (GNAF)
— ProShares Short High Yield (SJB)
— Direxion Daily 20+ Year Treasury Bear 1X Shares (TYBS)
— Invesco DB US Dollar Index Bearish Fund (UDN)
— ProShares Short MSCI Emerging Markets (EUM)
— Direxion Daily CSI 300 China A Share Bear 1X Shares (CHAD)
— ProShares Short MSCI EAFE (EFZ)
— AdvisorShares Ranger Equity Bear ETF (HDGE)
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