How to Use Inverse ETFs to Your Advantage in a Down Market
It’s always nice to have a backup.
An extra set of batteries in case the flashlight goes out…
A spare key for when you lock yourself out of the house…
Or, in our case, an emergency plan for when the market goes off its meds.
I’m sure you know the old saying “I’d rather have it and not need it than need it and not have it.”
Well, over the past couple of weeks, you definitely needed this backup plan.
The major U.S. stock indexes collapsed more than 30% in less than a month. And many Americans found themselves sheltering in place until further notice.
But if you had made a few hedges before March 9, you wouldn’t be feeling the pain quite so much right now.
Coulda, Woulda, Shoulda
Hindsight is 20/20. I don’t think anyone can dispute that.
And it’s easy to throw around “coulda, woulda, shoulda” after the storm has passed.
But if I learned one thing in physics class, it’s that what goes up must come down.
Prior to the market crash last month, this was the longest-running bull market in U.S. history. Eleven years of unadulterated bliss.
Sure, there were a few corrections along the way. But the bloodbaths were few and far between – or confined to a single sector.
Still, we knew this would happen…
Alas, the bull was dead…
And the bear came out of hibernation at full force.
But did you know that at the same time as we were seeing historic losses… a few corners of the market were seeing this?
These investments are called inverse exchange-traded funds (ETFs). In short, they’re a bet against a group of stocks. These plays allow investors to profit on an index’s or sector’s decline without the risk of short selling.
Inverse funds are a great hedge to use during a down market. When the market is at all-time highs, you can pick them up for cheap. And then, while everyone is panic-selling, you can take profits.
For example, the ProShares UltraShort Oil & Gas (NYSE: DUG) fund is a hedge against the oil industry. And that’s why it’s done so well recently…
At one point, the fund was up more than 150%. This directly correlated to the price of WTI crude cratering to $20.
Similarly, the ProShares UltraShort Financials (NYSE: SKF), which tracks banks, found itself flying high as interest rates circled the drain.
Some other outperformers have – no surprise – been the plays that track the broader markets, like the ProShares UltraShort Dow30 (NYSE: DXD), ProShares UltraShort S&P500 (NYSE: SDS) and ProShares UltraShort Russell2000 (NYSE: TWM).
These inverse funds soared while their corresponding benchmarks went down the toilet at a historic rate.
Always Have a Backup Plan
When the markets tank – as they did last month – you don’t have to go down with the ship.
A few small investments in inverse funds and other hedges – like bonds, Treasurys, precious metals, money market accounts and CDs – can be your lifeboat.
Regardless of what’s happening in the world, it’s a good idea to hold some bearish plays at all times, in addition to your bullish ones.
Plus, you’ll sleep better at night knowing that your wealth is protected and secured… no matter what you wake up to in the morning.
Stay safe and sanitized,