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Published: March 18, 2010
Last week marked the one-year anniversary
of the market's March 9 bottom. Since then, the S&P 500 has
risen from 676.53 in the darkest days of the financial crises to
a close of 1159.46 on Tuesday. That's a whopping +71% gain in
just over a year.
Now what?
Stocks certainly could continue to move higher. But they've come
a long way already and today's economy is still fraught with
uncertainty. Given these circumstances, it might be worthwhile
to consider adding something to your portfolio that is virtually
guaranteed to go up when the market goes down.
Fortunately, there is an easy way for investors to bet on or
hedge against a down market: Inverse ETFs
An "inverse"
ETF is an exchange-traded fund designed to rise when the
market falls. Introduced in 2006, these investments enable
investors to easily benefit from the decline of a market
index or
benchmark.
Don't be scared off by the complex, mathematical-sounding name.
Investing in inverse ETFs is very similar to investing in
regular ETFs.
They're similar to closed-end mutual funds in that they're
traded on major stock exchanges and can be brought or sold any
time just like a stock. (Mutual funds can only be bought or
redeemed once a day.)
The difference with inverse ETFs is the content of their
investments. While regular ETFs generally invest individual
securities and indexes with the intention of profiting from a
rise in the market or a certain sector, inverse ETFs invest in
derivatives instruments and strategies that are designed to
appreciate when a given benchmark goes down.
You can find inverse ETFs associated with virtually every
important broad market index or industry sector (such as
financial or healthcare). If you think an index or benchmark
will go down, you buy shares of the corresponding ETF. When you
think a downturn has run its course, you sell it.
Specific Inverse ETFs
Inverse ETFs that focus on the broader market indexes include
Short S&P 500 ProShares (NYSE: SH), Short Dow30 ProShares
(NYSE: DOG) and Short QQQ ProShares (NYSE: PSQ) which
focuses on the Nasdaq 100. These ETFs track the inverse daily
performance of the underlying indexes. In short, they are
designed to go up in value by about the same amount as the index
goes down.
To be sure, inverse ETFs are not without risk. While they
appreciate when the market goes down, the reverse is also true.
These investments will lose value in a rising market. Also,
given the complicated and sophisticated derivatives employed to
affect the strategy behind inverse ETFs, there is no guarantee
that they will achieve the desired effect. They could exaggerate
a market move or not completely capture the inverse performance
of a given benchmark.
One notable inverse ETF is the UltraShort S&P500 ProShares
(NYSE: SDS). This is a turbo-charged inverse ETF that uses
leverage to track twice or 200% of the inverse daily
performance of the S&P 500. All well and good when the market is
falling, but if the market goes up, this security loses value in
a hurry.
However, when used properly, inverse ETFs can mitigate the
negative effect of a falling market on a portfolio and help
balance out returns in an uncertain period.
-- Tom Hutchinson
Staff Writer
StreetAuthority |
