Shorting the market is a strategy that doesn’t sit well with many investors. After all, it seems a bit morbid to profit as others are suffering. But in this difficult market, where there’s not a whole lot of upward momentum to be had, it can be in your best interest to consider a focused play on a specific part of the market you believe is in for some trouble.
Think the market is set to take a spill? Consider the ProShares Short S&P 500 ETF (NYSE:SH). It’s not a 1-to-1 inverse play on the market because of fees and the logistics of a short-selling strategy. But it is indeed a directional play — and one that you don’t have to research strike prices or options expiration dates to buy into. Think emerging markets are overbought? Consider the ProShares Short MSCI EAFE Fund (NYSE:EFZ) that goes up as the MSCI EAFE emerging market index goes down (that’s short for Europe, Australasia and Far East, if you’re wondering).
There also are supercharged sector-focused ETFs that play a particular industry. Take the Direxion Daily Financial Bear 3X ETF (NYSE:FAZ), which profits as the financial sector declines — three times over! This leveraged ETF is a very risky play, but consider that FAZ almost doubled in a few weeks across late July and early August as the market volatility eviscerated the financial sector. If you were one of those investors who had nothing but bad things to say about the banks and saw this crash coming, you could have played the downside this trade.
Remember, short-side ETFs and leveraged ETFs like the 3X financial fund discussed here are a bit riskier than other funds. They tend to charge you more in fees due to their intensive strategy and active management necessary for such strategies. But if you have strong feelings about a short-term directional play in the market, these ETFs are a very easy and effective way to spice up your portfolio and beat the market.
After all, why settle for beating the market with smaller losses when you can profit from a downward move with funds like these?