Think the correction is the beginning of some bigger downturn? Well, put your money where your mouth is with inverse ETFs that can generate two times or even three times the profits of a short-side strategy.
Just be sure you are confident in your strategy — because three times the profits can turn into three times the losses in a hurry should you bet wrong.
Inverse funds, also known as short ETFs, are simple in concept: They are designed to go up as the underlying assets go down.
Leveraged short funds go one step further. Through a complex investment strategy that involves derivatives and futures contracts, a company makes big-time directional bets on the market that a typical retail investor cannot. These amplify the power of the bet.
The profits get bigger and the losses get bigger, too, so in a fast-moving market you can easily see a double-digit swing.
Here’s a practical example: The Direxion Daily Large Cap Bear 3X Shares (SPXS) is pegged to the S&P 500. Theoretically, it is supposed to go up three times what the S&P loses in a given day. So if the S&P is up 1%, the SPXS fund loses roughly 3%. If the S&P is down 2%, the SPXS gains roughly 6%.
Note the use of the word “roughly” — Expenses and other logistical constraints mean the 3x multiplier is not exact, but it’s pretty close.
Consider that in the past week, the S&P 500 Index is down almost 5%, and the SPXS fund is up 14%. Not quite three times, but pretty close — and a very nice return.
Of course, if the S&P soars, the pain will be threefold, too … but investors who bought in a week ago are sitting pretty.
If you’re looking for the other side of the trade in the event of a downward-trending market, here are some short funds with leverage that could pay off in the short-term:
2x Short Funds
- ProShares UltraShort Dow 30 ETF (DXD): -200% of the Dow Jones Industrial Average.
- ProShares UltraShort Mid Cap 400 ETF (MZZ): -200% of the S&P Mid Cap 400.
- ProShares UltraShort QQQ ETF (QID): -200% of the Nasdaq-100.
- ProShares UltraShort Russell Mid Cap Value ETF (SJL): -200% of the Russell Mid Cap Value Index.
- ProShares UltraShort Russell Mid Cap Growth ETF (SDK): -200% of the Russell Mid Cap Growth Index.
- ProShares UltraShort Russell1000 Value ETF (SJF): -200% of the Russell 1000 Value Index.
- ProShares UltraShort Russell1000 Growth ETF (SFK): -200% of the Russell 1000 Growth Index.
- ProShares UltraShort Russell 2000 ETF (TWM): -200% of the Russell 2000 Index.
- ProShares UltraShort Russell 2000 Growth ETF (SKK): -200% of the Russell 2000 Growth Index.
- ProShares UltraShort Russell 2000 Value ETF (SJH): -200% of the Russell 2000 Value Index.
- ProShares UltraShort Russell 3000 ETF (TWQ): -200% of the Russell 3000 Index.
- ProShares UltraShort S&P 500 ETF (SDS): -200% of the S&P 500.
- ProShares UltraShort Small Cap 600 ETF (SDD): -200% of the S&P Small Cap 600.
3x Short Funds
- Direxion Daily S&P 500 Bear 3x Shares (SPXS): -300% of the S&P 500 Index.
- Direxion Daily Mid Cap Bear 3x Shares (MIDZ): -300% of the S&P Mid-Cap 400 Index.
- Direxion Daily Small Cap Bear 3x Shares (TZA): -300% of the Russell 2000.
- ProShares UltraPro Short QQQ ETF (SQQQ): -300% of the Nasdaq 100.
- ProShares UltraPro Short Dow 30 ETF (SDOW): -300% of the DJIA.
- ProShares UltraPro Short S&P 500 ETF (SPXU): -300% of the S&P 500.
- ProShares UltraPro Short Mid Cap 400 ETF (SMDD): -300% of the S&P Mid Cap 400.
- ProShares UltraPro Short Russell 2000 ETF (SRTY): -300% of the Russell 2000.
Remember, the added volatility can hurt you by double or triple if you bet incorrectly. It’s also worth noting that the expense of these short funds can really wear at you long-term and that the leverage is commonly done on a daily basis, not over time, so buying-and-holding is not advised.
But the above list is worth browsing for aggressive investors looking to play the downside of the market, either as speculation or as a hedge.
- The Securities and Exchange Commission has some warnings about leveraged and inverse ETFs you should read. (SEC.gov)
- ProShares has a host of short funds out there and here’s its full list of products. Here’s Direxion’s list, too. (ProShares.com and DirexionFunds.com)
- A helpful Q&A on how (and whether) you should trade inverse funds. (WSJ)
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at email@example.com or follow him on Twitter via @JeffReevesIP.