For those of you who have been investing for some time you may already know the answer but for the rest of you, is there something you can do to help protect your portfolio in the event of more market wide selling? Hint, it does not involve put options, futures (my personal favorite) or short selling.

The answer is short ETF's or ETF's that increase in value as the markets decrease in value.

Inverse (Short) Market Cap ETFs
ProShares Short QQQ ETF - PSQ
ProShares Short S&P500 ETF - SH
ProShares Short MidCap400 ETF - MYY
ProShares Short Dow30 ETF - DOG
ProShares Short Russell2000 ETF - RWM
ProShares Short SmallCap600 ETF - SBB

Leveraged Inverse (Short) Market Cap ETFs
ProShares UltraShort QQQ ETF - QID
ProShares UltraShort S&P500 ETF - SDS
ProShares UltraShort MidCap400 ETF -MZZ
ProShares UltraShort Dow30 ETF - DXD
ProShares UltraShort Russell2000 ETF - TWM
ProShares UltraShort SmallCap600 ETF - SDD

ETF List obtained through Data Markets Inc.

What Are They?

  • Inverse ETFs aim to provide the opposite performance to their benchmark, ie. the same effect as shorting the stocks in the index. An inverse S&P 500 ETF, therefore, is a negative bet on the S&P 500 and aims to provide a daily percentage movement opposite to that of the S&P. So if the S&P 500 rises by 1%, the inverse ETF should fall by 1%; and if the S&P falls by 1%, the inverse ETF should rise by 1%.
  • Leveraged Inverse ETFs aim to provide some multiple of the opposite performance to their benchmark. The ProShares UltraShort S&P500 ETF, for example, aims to provide double the opposite performance to the S&P 500. So if the S&P 500 rises by 1%, the leveraged inverse ETF should fall by 2%; and if the S&P falls by 1%, the inverse ETF should rise by 2%. 

Why & How To Use Them

  • Possible reasons to short an index: (1) A long term investor has an illiquid position in a stock or group of stocks, and wants to be protected against a market decline. (2) A long term investor believes the market will fall, and has a large unrealized capital gain that he/she doesn't want to realize. (3) A short term trader wants to make a bearish bet on the market.
  • Inverse ETFs may have specific advantages for bearish non-professional investors over shorting index ETFs: (1) Inverse ETFs may be purchased in individual retirement accounts [IRAs]; whereas investors may not short stocks or ETFs in some IRAs. (2) Purchase of an inverse ETF exposes the investor to limited losses -- the most you can lose is the entire value of the inverse ETFs. Shorting a stock or ETF, in contrast, exposes the investor to potentially unlimited losses.

Cheers,
Mike