There is a bear market coming. We don’t know when it will come, but it will come, and the bull will toss everyone off its back and those same folks will get mauled by the bear. The market is at least 30% overvalued, even accounting for the tax cut, and a correction is going to take things down significantly.
How do you protect yourself against the bear?
For starters, you MUST have a diversified long-term portfolio with many forms of low-volatility, non-correlated investments like The Liberty Portfolio, my stock advisory newsletter. The Liberty Portfolio is specifically designed for all market periods, up or down, bull or bear.
Now, I know that some investors want to try and grab some downside profits when the bear arrives. That’s fine. I also know some investors will want to try and make big profits when things really go south. That does mean taking on lots of risk (which I don’t advise), and gobbling up big gains by riding the bear lower.
So for those of you out there who are this aggressive, here are leveraged exchange-traded funds that will turbocharge your returns … but be very careful.
The simplest and most straightforward leveraged ETFs move on a bear stock market is the Direxion Daily S&P 500 Bear 3x ETF (NYSEARCA:SPXS). The way this ETF operates is that it uses debt to lever up higher returns, and that’s why it is called “leveraged.” With that 3:1 leverage proportion, the SPXS mirrors each dollar of invested capital with two bucks of invested debt. That debt could involve either futures contracts or other derivatives.
There are other leveraged ETFs that aim for this tripled return. The ProShares UltraPro Short S&P 500 ETF (NYSEARCA:SPXU) utilizes thing called swap contracts for leverage. A swap contract is a form of contract between two parties, one of which is usually an investment bank, regarding a financial security of some kind.
Is 3x leverage too much for you? No problem, there are several 2x leveraged ETFs out there as well. ProShares UltraShort S&P 500 ETF (NYSE:SDS) doesn’t go for the big triple, but is content to double the daily return of the S&P 500 using derivatives and stocks. Just remember that the daily return you hope for is a negative one.
There are also even more aggressive plays, such as inverse leveraged ETFs that involve the more volatile Nasdaq 100. The largest six stocks in this ETF account for some 40% of the total index asset base, and you know them all, so you’d better be certain you are comfortable shorting these names: Apple Inc. (NASDAQ:AAPL), Microsoft Corporation (NASDAQ:MSFT), Amazon.com, Inc. (NASDAQ:AMZN), Facebook Inc (NASDAQ:FB), Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL). Thus, if you buy the ProShares Ultra Short QQQ (NYSEARCA:QID), not only are you taking on 2x the daily return of the Nasdaq 100 index, but that means those six gorillas are going to account for 40% of your performance. Those are the stocks that will likely fall later and recover sooner, so be careful
Mind you, if you truly think we are headed for Armageddon, then buy the ProShares UltraPro Short QQQ (NYSEARCA:SQQQ), which will deliver 3x the daily return.
There are other plays, too, and these can be utilized even if the entire market is not in meltdown. Inverse Sector ETFs allow you to short sectors of the market. So if terrible things are happening over in one sector but not others, you can take advantage of things. Personally, unless the market is in full meltdown, I see these are no more than day trades.
Can you guess the worst performing one-year return for a triple-leveraged sector ETF? It’s the Direxion Daily Semiconductor Bear 3x ETF (NYSEARCA:SOXS). Its 92.3% one-year loss was devastating for holders, and that’s no surprise considering some 33% of the asset base is poured into just seven stocks. It is also driven by seven stocks accounting for almost a third of the asset base.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 23 years’ experience in the stock market, and has written more than 1,800 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.