(by Chris Rowe)
Don't be afraid to take bearish positions here. The market is probably going at least 15% to 20% lower.
Although I typically like to use in-the-money put options to play the downside, options are going to be expensive as people become more fearful (due to increased volatility) and are willing to pay more for them.
So, it makes sense to start looking to the short exchange-traded funds (ETFs), the double-short or UltraShort ETFs, and, if you really want to dance with the devil, the newer triple-short ETFs.
If you're just day trading the downside, and don't really have bullish positions on the table, then you might be rolling the dice with these triple-short ETFs, as they are incredibly volatile. You could make a fortune or just get your butt handed to you with a ribbon on it saying "Nice doin business with ya."
However, if you're portfolio has too much bullish exposure -- meaning you're getting hammered right now -- then I wouldn't even call the triple-short ETF trade a dance with the devil. Instead, it just might be your savior in an otherwise bloody market.
What Are Triple-Short ETFs?
Triple-short ETFs are bearish investments that are leveraged to profit three times (300%) the inverse of the index they mirror.
Here are a few to consider:
• Large Cap Bear 3X Shares (BGZ) -- mirrors the Russell 1000 Index
• Small Cap Bear 3X Shares (TZA) -- mirrors the Russell 2000 Index
• Energy Bear 3X Shares (ERY) -- mirrors the Russell 1000 Energy Index
• Financial Bear 3X Shares (FAZ) -- mirrors Russell 1000 Financial Services Index
I'll use FAZ as my example. It seeks to replicate, net of expenses, 300% of the inverse daily performance of the Russell 1000 Financial Services Index. So, if the Russell 1000 Financial Services Index declines by 10%, FAZ should increase by about 30% ... and vice versa.
How to Hedge With Short ETFs
Let me stop here for a second. I would feel incredibly irresponsible if I didn't reiterate my warning about dancing with the devil.
Most investors conceptually "get" leverage. You don't need me to explain that a 3X ETF is three times as risky. But once you actually feel the sting a couple of times -- and if you trade anything like this, odds are that time will come at some point -- you will take on a whole new respect for my warning.
This is not a game. You can lose money -- big time. So, I want to show you how to hedge effectively.
This is the type of thing that can make you massive profits when you trade it right. However, that can lure you in, causing you to put a lot more money on the table, and that's when the trade goes the wrong way.
It's very easy in a market like this, one that has massacred so many trading accounts, to start to visualize anything as your great hope, the answer to your prayers, the lifeline that will pull you out of this mess and so on. Don't do it. If you've lost 60% of your portfolio, you shouldn't expect to make it back in 12 months.
Now, I don't want to scare you out of profits. You absolutely need to have bearish exposure in a market like this. So, use these ETFs to hedge in this latest market decline, but be smart, and don't overexpose yourself.
And I wouldn't be too quick to exit these ETFs if they move in the wrong direction. While the market may snap back for a quick rally, it's going to go lower than today's levels.
So, what do you do? You take a comfortable position and sit, as opposed to taking a position that's too big for your nerves.
No matter what you do, you have to be willing to play the downside of this market.
If triple-short ETFs seem too risky for you, perhaps the double-short ETFs are more your speed. These investments seek to profit twice the inverse of the sector index they mirror. They are a little less risky that the 3X ETFs, but they are still leveraged 200%, so the same warning applies.
Here are a few to consider:
• UltraShort Basic Materials ProShares (SMN)
• UltraShort Consumer Goods ProShares (SZK)
• UltraShort Consumer Services ProShares (SCC)
• UltraShort Financials ProShares (SKF)
• UltraShort Health Care ProShares (RXD)
• UltraShort Industrials ProShares (SIJ)
• UltraShort Oil & Gas ProShares (DUG)
• UltraShort Real Estate ProShares (SRS)
• UltraShort Semiconductors ProShares (SSG)
• UltraShort Technology ProShares (REW)
• UltraShort Utilities ProShares (SDP)
