Category Archives: etf
5 Wild Inverse ETFs Betting Against The Market
Inverse ETFs are all the rage so far in 2016. As the market retests the lows made in January, these instruments are making new yearly highs. Those that got in before the start of the year are seeing double-digit returns, with the market down over 10%. Inverse ETFs must be looked at as tools of protection, not investments. The leveraged ETFs are especially dangerous as they can go down just as fast as they go up. A common mistake that is made is when an investor is nervous and starts to panic. They enter an inverse ETF when the market is very weak, thinking they’ve done well after seeing one day with a nice percentage move. However, this is only to be followed by a week of pain because the market had a relief rally. This mistake is called chasing and is a strategy for future broke investors and traders. A better strategy when using ETFs is one that most people aren’t familiar or comfortable with. Rather, it’s one of a trader. If we are in a bear market, there will be furious rallies as there always is. News will hit and bottom pickers will get in at the same time that shorts will be covering, causing a bear market rally. When this process plays out inverse ETFs will provide a nice entry point to protect against your overall portfolio from further selling. When the relief rally is over and market comes back in, it is smart to take profits and wait for the next opportunity. There are many inverse ETFs to choose from, but it is important to pick the right ones for our strategy in order to get the most return. One of my strategies over the years has been to use filters to sort out which instruments are reacting on a daily basis. I look for high percentage and large up and down point moves. This is a game for those that like volatility and risk-adverse investors should shy away. Some of the inverse ETFs that have been popping up on my filters of late are listed below. These instruments should be very active going forward and should be utilized only by the most nimble investors. ProShares UltraShort Bloomberg Crude Oil (NYSEARCA: SCO ) will move two times the inverse to crude oil. If oil is down 5%, this instrument will be up 10%. This move would protect investors that were allocated heavy in oil stocks. In the chart below, we see Exxon Mobil (NYSE: XOM ) versus SCO over the last year, and how investors could protect against a position in Exxon. SCO was up 2% today with crude oil down over 1%. Direxion Daily FTSE China Bear 3X ETF (NYSEARCA: YANG ) is all about China. This ETF will move three times the inverse of the FTSE China 50 Index. The fund creates short exposure by using 80% of its assets to get short in futures and other Chinese instruments. China has been a real drag on global stock markets as issues of global growth are surfacing because the Chinese economy seems to be slowing. The chart below shows China internet giant Baidu (NASDAQ: BIDU ) over the last three months in comparison to YANG. The ETF was up 7% today in anticipation of a big down day in china on Monday, when traders return from the New Year holiday. Direxion Daily Gold Miners Bull 3X ETF (NYSEARCA: NUGT ) seeks to reflect three times the inverse of the performance of gold minor stocks in the NYSE Arca Gold Miners Index. Gold is shooting higher because of financial stress fears coming from the banks; this in turn is good for gold stocks. The minors essentially get paid more for every ounce of gold they mine, improving the bottom line. If fears about European banks persist; gold will continue to have a bid. With all the gold miners catching that bid today, NUGT was up 22% as of this writing. Direxion Daily Financial Bear 3X ETF (NYSEARCA: FAZ ) is an inverse financial ETF that will move three times the inverse of the performance of the Russell 1000 Financial Services Index. The combination of European banking woes and the potential of negative interest rates has lead to weakness in the sector. The chart below shows Goldman Sachs (NYSE: GS ) in comparison to FAZ over the last three months. FAZ was up 8% today as of this writing. Direxion Daily Emrg Mkts Bear 3X ETF (NYSEARCA: EDZ ) is an inverse emerging markets ETF that moves three times the inverse of the performance of the MSCI Emerging Markets Index. This fund will move higher as emerging stock markets struggle. These markets have been some of the hardest hit over the last year, and that is reflected in the surge of EDZ. The ETF was up 5% today as of this writing. In Summary Leveraged Inverse ETFs give investors options in protecting their core positions. Markets will become volatile when under selling pressure, and these ETFs will follow suit. The approach for this protection isn’t one of chasing, like one would chase a momentum stock, but rather buying large market rallies and selling the panic of market dips. Original Post
The Bright Side Of Volatility
Stock markets around the world have had a bumpy ride so far in 2016. The CBOE Volatility Index (often called the “VIX”), a measure of expected stock market volatility, has doubled since early November , and US stocks have fallen more than 10% since the start of the year. These kinds of changes can be gut-wrenching and can make it difficult to maintain a long-term perspective. But for some investors who are able to do so, there’s a bright side to volatility. If you’re periodically investing money, such as putting a portion of each paycheck into a 401(k) account, volatility isn’t necessarily bad. When markets fall you’re able to acquire more shares, giving you “more bang for your buck.” This concept is similar to ” dollar-cost averaging ,” where the average price you pay for an investment will be less than the average of the prices at each of the times you’re investing (because you’re acquiring more shares when the price is low and fewer shares when the price is high). Compared to if markets just blandly moved in a straight line, the ups and downs allow your periodic investments on average to go farther. Of course, there are a few caveats to this volatility fairy tale. First, it assumes that the market will end up in the same place regardless of how much volatility there is. This assumption is clearly sometimes false; stock markets would almost certainly be higher right now if the beginning of this year had been a paragon of financial tranquility. But over the long term it’s approximately true. Stock prices 20 years from now are unlikely to be massively affected by how much stock market volatility there was in 2016. Second, the potential benefits of volatility only apply if you have a long time horizon for your investments. If instead you need the money in the near future and markets plunge, the fact that you can then get more bang for your buck won’t do much good. Perhaps the most important caveat, however, is that you need to be able to stick to your strategy of periodically putting more money into the market. When the kind of turbulence that’s characterized stock markets this year arrives, it can be tough to invest money knowing that one wild day of market moodiness might eliminate a chunk of it. But those who are able to continue making periodic investments can benefit in the long run.