1. Short-Term Hedging. If you follow a variety of writers, analysts and commentators, you may have discovered what is often described as the intermediate trendline (a.k.a. 100-day moving average). When one of the largest publicly traded funds like the SPDR S&P 500 Trust (SPY) breaks below its 100-day, one might be wise to prepare for additional selling in broad market U.S. stock ETFs.
In tax-deferred accounts, one could choose to lighten up on some exposure to ETFs like iShares S&P 500 (IVV) or SPDR Dow Jones Industrials (DIA) through the use of stop-limit orders. For those who do not wish to realize gains in taxable accounts and/or who simply want to neutralize their long U.S. holdings without selling, an Inverse ETF can serve as a useful hedge.
For example, an investor who is long the S&P 500 with a 20% allocation may wish to reduce the net long exposure to 15%. He/she might choose to buy a 5% allocation to ProShares Short S&P 500 (SH). The goal here is not to gain from a bearish prognostication, but rather, an exercise in minimizing loss by hedging against further declines in large cap U.S. equities. Remember, Inverse ETFs are daily compounding trading tools — not annual compounding assets. It follows that the longest span in which I might use an Inverse ETF is approximately eight to ten weeks.