Published:
October 13, 2008
The
tumult and uncertainty on Wall Street have ratcheted up to a
whole new level. And by a number of measures, including an
abnormally high CBOE Volatility Index, we may be in for more
difficult times and bumpy rides ahead.
As troubled as it has been, the market has benefited from some
forays from bargain hunters and stress-relieving late-day
rallies. But that doesn't disguise the fact that our
economy, as well as many others around the world, will face
significant challenges in the foreseeable future. My hope is that
governmental leaders, both here and abroad,
will rise to the challenge and work in constructive ways
befitting the magnitude of our collective concerns.
With all that as a backdrop, I wanted to take just a minute to
remind you there are ETFs that will allow you to profit, no
matter the market.
For instance, the UltraShort MSCI Emerging Markets
ProShares (AMEX: EEV) is a perfect solution for
investors worried that emerging markets stocks are overheated
and prone to even deeper declines. As an inverse/short fund, EEV and others like it are designed to move in the opposite
direction as an underlying index -- meaning shareholders
actually profit when the benchmark tanks, and vice-versa. And in
EEV's case, it is designed to double the inverse of its
benchmark.
In other words, the fund was made for markets just like this.
As markets around the globe have sold off in the last couple of
weeks, EEV
surged from $98.19 to $172.62 per share -- a remarkable gain of nearly
+75.8% since the end of September.
Of course, EEV is just one of many inverse funds aimed at
different sectors and regions. And as you can see from the table
below, all have done exactly what they were designed to do in
this rough market:
|
Fund |
3-Month Return |
YTD
Return |
1-Year
Return |
|
UltraShort Basic Materials (AMEX: SMN) |
+97.7% |
+41.5% |
+25.4% |
|
PowerShares DB Oil 2X Short (NYSE: DTO) |
+92.3% |
N/A |
N/A |
|
UltraShort Oil/Gas ProShares (AMEX: DUG) |
+63.1% |
+25.4% |
+12.1% |
|
UltraShort MSCI Emerging Mkts. (AMEX: EEV) |
+59.8% |
+68.4% |
N/A |
|
UltraShort Semiconductor (AMEX: SSG) |
+56.5% |
+83.8% |
+104.2% |
|
UltraShort Russell Mid-Cap (AMEX: SDK) |
+50.4% |
+65.3% |
+70.3% |
|
UltraShort FTSE/Xinhua China (AMEX: FXP) |
+37.4% |
+55.2% |
N/A |
|
UltraShort MSCI Japan (AMEX: EWV) |
+36.7% |
+44.1% |
N/A |
|
UltraShort Technology ProShares (AMEX: REW) |
+32.8% |
+57.3% |
+57.8% |
|
UltraShort Russell 1000 Growth (AMEX: SFK) |
+32.6% |
+55.5% |
+58.4% |
|
Rydex Inverse 2X S&P Mid-Cap (AMEX: RMS) |
+27.9% |
+33.9% |
N/A |
|
Short MSCI EAFE ProShares (AMEX: EFZ) |
+24.4% |
+40.0% |
N/A |
|
UltraShort Industrials ProShares (AMEX: SIJ) |
+21.3% |
+46.9% |
+58.0% |
|
UltraShort S&P 500 ProShares (AMEX: SDS) |
+20.8% |
+50.4% |
+62.5% |
|
Data as of 9/29/08 |
|
The table above was constructed at the end of September, and
most of these ETFs have posted even higher returns since. And
while the table shouldn't be construed as a recommendation
of the funds listed, it does provide a small random sample of
what is available.
Just a few years ago, investors interested in profiting from a
downturn in a specific corner of the market had to borrow shares
from their broker, short individual companies -- and then hope
they didn't pick a stock that went against the grain and moved
higher. But now, betting against banks, small-cap stocks, or
even entire market averages is just one convenient ticker symbol
away thanks to issuers like Rydex and ProShares.
For the most part, I haven't placed terribly much emphasis on
inverse funds in the past. After all, I'm generally a long-term
investor, and ultimately the market goes up far more than it
goes down. However, there are certainly times when this group
can be very appealing, as the gains in the table above clearly
prove.
These inverse funds can be looked at as a type
of insurance policy for your portfolio. In other words,
investing a modest amount in one of these funds can be a useful
way to protect profits in certain asset classes or simply hedge
against further market declines. And like any insurance premium,
you hope it's never needed; ideally, the market reverses course
and you end up realizing a small loss on the position that is
more than offset by gains elsewhere.
But the events of recent days illustrate that sometimes
unexpected circumstances can materially impact your portfolio,
in which case an inverse fund can help soften the blow. The
lower the market retreats, the higher these funds advance. With
all this in mind, readers might want to consider how adding an
inverse fund or two might help smooth out some of this
unprecedented market volatility.
Nathan Slaughter
Editor
The ETF Authority
About
The ETF Authority
The mission of The ETF Authority
is to help our readers identify today's most profitable ETFs and closed-end
funds. (Learn
More)
About Nathan Slaughter
Nathan Slaughter has developed a long and successful track
record over the years by investing in both exchange-traded funds (ETFs) and
deeply discounted value securities. When it comes to ETFs, Nathan has
created a proprietary ranking system that helps him zero in on today's most
promising funds.
Nathan's previous experience includes a long tenure at
AXA/Equitable Advisors, where he provided comprehensive investment advisory
services to small businesses and high net-worth clients. He also honed his
research skills at Morgan Keegan, where he performed asset allocation,
retirement planning, and consultative portfolio management services.
Several years ago Nathan switched gears and decided to devote
his time exclusively to financial analysis and writing. He has since published
hundreds of articles for a variety of prominent online and print publications,
and he now writes exclusively for StreetAuthority.com.
Nathan's educational background includes NASD series 6, 7, 63,
& 65 certifications, as well as a degree in Finance/Investment Management.
He currently resides in Shreveport, LA with wife Julie and sons Aidan and Riley.
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|
