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Let’s face it, shorting isn’t for everyone…
Going short requires a margin account with enough cash to cover 150% of your position when you borrow shares of a stock in order to sell them short.
Or you’ve got to know how to trade options - and while trading put options doesn’t require margin, it does require special clearance in your trading account.
But there’s another way to make money when markets go down…
An Inverse Exchange-Traded Fund (also known as a “bear” or “short” ETF) is an investment vehicle that uses a basket of derivative investments to track the inverse performance of an underlying benchmark.
They’re not only a great way to profit when markets go down, they can also help you hedge your portfolio during a bull market.
But before you take the plunge on inverse ETFs, there’s something you should know…
The Pros and Cons of Leverage
Inverse ETFs usually come in three varieties: -1x, -2x, and -3x.
A -1x ETF tracks 1:1 with the underlying, while -2x and -3x use leverage to double or triple the inverse results…
So at 1x, if the underlying goes down 5%, the inverse fund is designed to go UP 5%. -2x and -3x funds would go up 10% and 15% respectively.
The danger of using leveraged inverse ETFs is that the more leverage you take on, the more susceptible the fund is to what’s known as a tracking error - the difference between the actual returns of the fund and the underlying benchmark.
For that reason, inexperienced traders should stick with 1x inverse ETFs to avoid the risks involved with leverage.
It’s also important to note that inverse funds are designed to give a -1x return of the underlying benchmark for a single day. The longer you hold even a -1x ETF, the more likely your position will experience a tracking error. Keep that in mind.
That said, here are some of the best inverse ETFs on the market…
3 ETFs to Profit When Markets Go Down
ProShares Short S&P 500 ETF (SH) - tracks -1x the performance of the S&P 500. It’s the most popular inverse ETF on the market, with $3 billion in assets under management.
As of this writing, the ProShares Short S&P 500 ETF is up 19.82%, just a hair off the -19.74% the S&P has lost over the same time period.
ProShares Short QQQ (PSQ) - PSQ provides investors with -1x returns of the Nasdaq benchmark, which has taken a serious beating in 2022. That should continue as the bear market squeezes speculative capital (dumb money) out of the markets for the next few months.
Year to date, PSQ has handed investors 31.12% while the Nasdaq Index has lost 28.58%.
ProShares UltraPro Short QQQ (SQQQ) - As noted above, the Nasdaq has taken a beating this year, the worst performer of the major market benchmarks. If you’re comfortable taking on leverage, the ProShares UltraPro Short QQQ targets a -3x performance of the Nasdaq Index.
Take a look…
You’ll notice that the price of SQQQ is much more volatile and prone to fluctuations than PSQ - that’s the downside using leveraged ETFs.
The upside? Year to date, SQQQ has seen highs of +122% when the Nasdaq composite hit lows of -31% on the year.
But as you can see on the chart, tracking error can eat into your returns, especially when the trend reverses and the benchmark moves to the upside.
In mid-March, when the Nasdaq made a short-lived 13% gain, SQQQ crashed, dropping 40%.
As always, make sure that any leverage you choose to take on is in line with your own personal risk tolerances.
Of course, you can use technical analysis to trade inverse funds as well. At Stock Navigators, we use Echo Mapping to trade technically. It works for stocks, cryptos, bonds, ETFs… all sorts of investments - click here to learn more about it.
Stock Navigators has one mission - to help people improve their lives via trading. And it's all made possibly by our team of stay-at-home day traders who provide the most up-to-date analysis every single day. With over twenty years of combined trading experience, Stock Navigators helps you stay on top of the market.
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