The recognized advocate of holding stocks forever is Warren Buffet. Following his footsteps are armies of financial advisers that are promoting the “buy-and-hold” concept as the catch-all to meet every citizen’s long-term financial plans. But recent volatility and uncertainty starting in 2008 and continuing to the present day have bred a lot of discontent with this idea.
With inverse ETFs, it is now possible to “buy” an investment portfolio that is designed to profit when markets fall. These ETFs are a blend of the culture of buying and holding an investment and professional management that takes bearish market views and applies the tools and strategies that are not readily available to the general public.
One ETF that is designed to seek profits from market calamity is the Direxion Daily Financial Bear 3X ETF (NYSE:FAZ). FAZ seeks to profits when the Russell 100 index drops. Significant leverage is used to supercharge the daily returns by 300%. The downside to this strategy is when the Russell 100 index rises — the loss is magnified at the same degree.
Created in the 1970s, a strategy known as the “Dogs of the Dow” was sold by the major wirehouses. The concept is to buy the top 10 dividend-paying stocks of the DJIA, hold for one year, then adjust the holdings to hold the top 10 dividend paying stocks again. This seeks undervalued stocks in expectation of price increases and better dividends. Today the ProShares Short Dow 30 ETF (NYSE:DOG) seeks profits by the use of derivatives that will generate daily returns equal to 100% of what the DJIA does inversely. So when the “dogs” get fleas and start scratching, this ETF is positioned to profit as the itch gets worse.
Another program that goes beyond inverse of the benchmarks is the AdvisorShares Active Bear ETF (NYSE:HDGE). This is an actively managed ETF that seeks profits by bottom-up screening stocks that are believed to drop in share price. Fund management looks for companies that will be facing difficulties or are believed to exercise some sort of earnings management designed to please Wall Street analysts. The idea of HDGE is to find more dogs before the general public does.
Jeffrey L. Stouffer is the principal of Mercantile Capital Group, a Herndon, Va.-based introducing broker registered with the CFTC and a member of the National Futures Association. He can be reached at email@example.com. He has no direct or indirect holdings in these ETFs.