The 4 Best ETFs to Short the Market in 2018
Citigroup analysts, according to a recent note, are predicting a full-on bear market within the next few months, based on historical trends. If indeed that proves to be true – and the multi-year bull market is set to pause, or at least slow down – then it may be time to consider diversifying your portfolio with products that soar when the market slips.
Shorting the market is a bet that the market will sink. You can profit if you have a short position. You can do this with individual stocks, but you have to be impeccable in your selections. An exchange-traded fund (ETF) allows you to short a market segment instead of individual stocks. Keep in mind that “the market” is actually made up of distinct segments.
We have selected ETFs to short significant segments that have a reasonable chance of making a downturn or at least experience a correction within a bull market. We excluded ETFs that are leveraged, because these greatly increase investor risk.
So-called inverse ETFs carry much more risk than ETFs that take long positions in equities, so be advised that this is more of a trading strategy than a long-term investment approach. You can lose money if there is a short squeeze.
Markets often rebound on news, so if you have successfully shorted a market and have profits on the table, maintain disciplined rules about taking profits. Such rules can override the emotion of greed. (See also: Risks of Short Selling.)
Some of these funds are new. They have not been chosen because of their longevity, but because of their focus on a particular market segment. Average volume may be low due to the fact that not many investors have been shorting these markets. New funds may have started in anticipation of shorting markets that are preparing for a downturn. In such cases, expenses and year-to-date yield figures may be low.
One way to anticipate good markets to short is to watch the volume levels in these ETFs. If you see average daily volume picking up, this may indicate that investors are seeing weakness in the market segment. Increased interest can mean that a consensus is building. (See also: Top 4 Inverse ETFs for a Bear Market)
All information is current, as of July 24, 2018.
1. ProShares Trust – ProShares Short S&P 500 (SH)
The S&P 500 is a measure of large-cap U.S. stock market performance. This fund takes short positions in the index, making it a broad-based method for shorting the U.S. stock market as a whole.
- Avg. Volume: 2,793,033
- Net Assets: $1.35 billion
- Yield: 0.46%
- YTD Return: -2.43%
- Expense Ratio (net): 0.89%
- Inception Date: June 19, 2006
2. ProShares UltraShort S&P 500 (SDS)
This aggressive fund aims to earn twice as much as what the S&P 500 loses. Like the ProShares Short ETF mentioned above, the UltraShort is large-cap focused; however, it’s a higher risk version of the UltraShort. SDS uses derivatives to achieve its goals, is not a long-term play and is best for investors betting on a negative market.
- Avg. Volume: 4,360,341
- Net Assets: $854.37 million
- Yield: 0.62%
- YTD Return: -6.40%
- Expense Ratio (net): 0.89%
- Inception Date: July 11, 2006
3. Direxion Daily CSI 300 China A Share Bear 1X ETF (CHAD)
If you expect China’s economy and market to stumble, you can use this ETF to short the CSI 300 Index. This fund shorts the largest stocks in the Chinese market. (See also: Shorting China: Top Ways to Utilizing ETFs.)
- Avg. Volume: 9,621
- Net Assets: $116.36 million
- Yield: 0.28%
- YTD Return: 13.62%
- Expense Ratio (net): 0.79%
- Inception Date: June 17, 2015
4. Direxion Daily Total Bond Market Bear 1X ETF (SAGG)
The Fed has indicated it will raise interest rates regularly going forward. Higher interest rates tend to hurt bond prices. You can short the Barclays Capital US Aggregate Bond Index with SAGG. However, note that the volume is very low and therefore their is a liquidity risk.
- Avg. Volume: 579
- Net Assets: $3.19 million
- Yield: 0.52%
- YTD Return: 3.01%
- Expense Ratio (net): 0.45%
- Inception Date: March 23, 2011
The Bottom Line
Shorting individual stocks can be riskier than buying ETFs that short the market. Instead of looking for company weakness, you must get in the habit of looking for market weakness. You will have the protection of shorting several stocks instead of just one. This spreads your risk.
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