This article originally appeared on Traders Reserve.
With the violent political upheaval in Libya, and tensions in the Middle East, oil prices spiked above $100 per barrel last week. If crude prices stay this high, or go even higher, that could stop the current bull run in it tracks. If that is the case, investors would be wise to hedge their portfolios. But they shouldn’t stop there.
Why not take advantage of the selling with exchange-traded funds (ETFs) designed to move higher when stocks are in descent, i.e., inverse ETFs, otherwise known as short ETFs. They could be your best chance at making money in this market.
Here are five short ETFs to buy now:
Short ETF #1 – ProShares Short S&P 500 (SH)
If you think the recent selling in equities is a harbinger of more pain to come, then your broadest bet is the ProShares Short S&P 500 (NYSE: SH). This inverse ETF is designed to move in the opposite direction of the broad market S&P 500 Index. Basically, if the S&P 500 were to go into correction mode, falling another 5% or so from where it trades right now, then SH would gain about 5%. Putting SH in your trading portfolio gives you an easy, low-cost way to hedge your long portfolio against further selling.
Short ETF #2 – ProShares UltraShort S&P 500 (SDS)
More intrepid traders might want to double down on their short bets against the broad market, and doing so is easy with the ProShares UltraShort S&P 500 (NYSE: SDS). This fund is designed to deliver twice the inverse performance of the S&P 500, so if that index were to correct by 5%, then theoretically you could get a 10% gain via SDS. While the prospects of this kind of gain may be tempting, remember that inverse ETFs can be quite volatile. If you’re going to use them, make sure you have a stop-loss in place to protect yourself if things don’t go your way.
Short ETF #3 – ProShares Short MSCI Emerging Markets (EUM)
Even before the latest selling in stocks caught fire, emerging markets were already burning. One of the darling sectors of the market in past years, so far 2011 has seen a retreat from emerging markets. Taking advantage of a continued slide in this sector is easy with the ProShares Short MSCI Emerging Markets (NYSE: EUM). This short ETF is up over 6% year to date. By comparison, the ProShares Short S&P 500 is down 3.4% on the year, and that’s despite a 2% rise in that fund just this week. This performance divergence between emerging markets and domestic markets is a trend that’s firmly in place — and that’s a trend traders can profit from via EUM.
Short ETF #4 – Direxion Small Cap Bear 3X Shares (TZA)
The small-cap segment of the market is usually volatile when compared to its mid- and large-cap brethren. That’s true on both the upside, as well as the downside. Lately, the downside trend is here in small caps, and that means big profit opportunities in the Direxion Small Cap Bear 3X Shares (NYSE: TZA). This fund is designed with aggressive traders in mind, as it employs leverage toward its goal of delivering three times the inverse performance of the small-cap Russell 2000 Index. If you’re firmly bearish on small caps, then TZA is great way to put your money where your conviction is.
Short ETF #5 – ProShares UltraShort DJ-UBS Crude Oil (SCO)
The final short ETF on our list may come as a surprise given the current spike in oil prices; however, this contrarian pick just might turn out to be the biggest winner of them all. It’s the ProShares UltraShort DJ-UBS Crude Oil (NYSE: SCO). This fund is a two-beta leveraged ETF against rising crude oil prices. So, if oil prices were to fall 4%, then SCO would likely surge 8%. This is clearly a play on a settling down, and a quick return to normalcy in the price of crude.
If tensions in Libya ease, or if other OPEC nations such as Saudi Arabia step up and announce intentions to fill any production void due to Libya, then we would likely see a spike in SCO. Think this is unrealistic? Well, consider that SCO spiked over 4% late in Thursday, Feb. 24, trade after rumors surfaced that Libyan leader Muammar Gaddafi had been shot. It is this kind of sector volatility that could provide big gains in this short oil ETF.
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