There’s no denying that stocks and exchange traded funds have made a bullish move in the latter half of March through the first week of April. In fact, from its March 16 low to its April 6 high, the Dow Jones Industrial Average surged more than 7%. The impressive move higher in the Dow, as well as a similar move in the other major domestic, international and emerging markets indices, was made even more impressive by the fact that the gains came in the face of surging oil prices.
But ETF investors and stock owners should realize that the spike in stocks in defiance of rising oil prices is a trend that’s not likely sustainable. At least not without a significant pullback—dare I say even a correction—on the short-term horizon for exchange traded funds and stocks. And that creates a big opportunity for short ETFs, or inverse exchange traded funds.
Iou’re long stocks here, you’ve probably already noticed the pullback forming this week. Over the past four trading sessions, stocks are down approximately 2%. If the selling continues, it could eliminate the gains we’ve seen since the aforementioned March lows.
Fortunately, traders don’t have to sit idly by and watch the value of their long positions dwindle. That’s because now it’s easier than ever to use targeted, inverse exchange-traded funds as a hedge during times when the market gets into sell-off mode. So, which short ETFs are likely to give investors the best chance of making money if the prevailing market winds take stocks lower? Here are three short ETFs to buy for the next correction.
ProShares Short Dow30
The Dow Jones Industrial Average my not be the broadest of market indices, but it certainly is the most well known, as well as the most widely followed among the general investing public. If the 30 stocks that make up the index are on a collective downturn, then a position in the ProShares Short Dow30 (NYSE: DOG) is going to make traders money.
This ETF investment seeks daily investment results, before fees and expenses, which correspond to the inverse of the daily performance of the Dow Jones Industrial Average. A simpler way to say this is that DOG is a bet against the Dow, and if the Dow falls 2% (as it has so far this week), DOG is designed to climb 2%.
ProShares Short MSCI Emerging Markets
Even more so than domestic equities, stocks pegged to the robust emerging markets segment have enjoyed a big surge from mid-March through early April. The iShares MSCI Emerging Markets Index (NYSE: EEM) jumped more than 12% over said time period, but here again, this week’s selling has infected emerging markets too, sending them down about 2.7% over the past four trading sessions.
Taking advantage of a slide in emerging markets is easy, thanks to the ProShares Short MSCI Emerging Markets (NYSE: EUM). This inverse ETF seeks daily investment results, before fees and expense, which correspond to the inverse opposite of the daily performance of the MSCI Emerging Markets Index. So, if the underlying index is down 3%, then EUM is designed to be up 3%.
ProShares UltraShort DJ-UBS Crude Oil
We all know that the price of oil is up big over the past couple of months. Since the middle of February, the cost of a barrel of crude has spiked 27%. Yet this week, we’ve seen a decisive pullback in the cost of crude oil, as traders reacted to an assessment by investment bank Goldman Sachs (NYSE: GS) that warned that oil is due for a “substantial pullback.”
Aggressive traders who want to get in on the Goldman assessment can do so with the ProShares UltraShort DJ-UBS Crude Oil (NYSE: SCO). This fund is a two-beta, leveraged bet against rising crude oil prices. That means that if oil prices were to fall 4%, then SCO would likely surge 8%. Conversely, if oil prices were to rebound, SCO would come back down hard. Only the most intrepid oil traders should venture into this leveraged ETF, and even then they should do so with a tight stop-loss in place for protection against the volatile spikes inherent in the oil patch.
As of this writing, Jim Woods did not own a position in any of the investments named here.
