Short ETFs offer best performance in a bear market slide
Posted on 18 August 2009 with no comments from readers
The bear market is back. Not with a vengeance but quite a subtle slide. That is perhaps more dangerous than a sudden collapse. The governments will not respond to gradual price erosion. But the sell-offs now are across the board and global.
So how should investors respond? The obvious thing to do is to short stocks and, or commodities. Going short is not as simple as going long, but in essence you are selling and not buying and profiting from a fall in prices.
Short timing
Timing is clearly important but once you have an established trend shorts are the ones who make the money in a falling stock market, and granted that falls can be quick, the profits can be as well.
Exchange Traded Funds have developed many useful short ETFs that are well worth considering for a short term punt on a falling stock or commodity market. Some offer leverage but again there is need for even more caution as leverage will work just as strongly in reverse; on the other hand, these ETFs will produce the best gain too.
Consider the list of best performing ETFs yesterday: http://finance.yahoo.com/etf/browser/mkt
It is clear that short ETFs were the place to be yesterday. A hedge fund can organize its own short position on the Nasdaq, and to be fair it is not that difficult for a sophisticated individual investor.
Short ETFs
But if you want a diversified short portfolio and have limited funds then short ETFs are a solution, and could prove highly profitable over the next couple of months.
Naturally if you think this is just a blip and that prices will head back up then invest for a rebound. If you reckon this is the next leg down in a bear market then short ETFs are an answer. You have third party risk in an ETF and in a major market crash that may be a real issue as financial institutions can and do fail.
Yet it is certainly true that more stock market fortunes are made quickly by shorting a stock market crash than by any other means but then past performance should not always be taken as a guide and you have to make your own decisions in investment.
Waiting to confirm a trend is one approach, or you could consider layering in shorts to try to avoid missing the best part entirely.
no Comments posted by readers:
Many of these ETF instruments, especially of the geared variety, have obscene tracking errors related to the underlying assets.
The progenitors of these products are the same banks who originated the fraudulent mortgage derivatives in the recent housing bubble.
Better to gain short exposure through options while premiums are low.
I believe that FAZ at $25 was a good entry point and SPXU at $52 was a great entry point. Time will tell within the next month or two if my picks were right. If financials and the S&P correct which I expect them to do then FAZ and SPXU should do pretty good.
By Bloomberg News
Aug. 19 (Bloomberg) — China’s stocks fell, driving the benchmark index into a so-called bear market more than 20 percent below this year’s high, on concern the nation’s economic recovery will falter as the government reins in lending.
The Shanghai Composite Index fell 4.7 percent to 2,774.77 as of 2:44 p.m. local time today, increasing its loss since the 14-month high on Aug. 4 to 20.2 percent. The gauge remains 59 percent below its record level on Oct. 16, 2007.
Prime Minister Wen Jiabao’s 4 trillion yuan ($585 billion) stimulus package, coupled with record bank lending in the first six months, helped the Shanghai index to more than double this year from the low on Nov. 4. The rally faltered as new loans in July declined to less than a quarter of June’s level, the regulator allowed initial share sales after a nine-month moratorium and companies including Yunnan Copper Industry Co. reported losses. China follows Russia among the so-called BRIC bloc of major emerging economies to have entered bear markets.
“The current correction is reflecting the tightening in lending,” said Andy Xie, a former Asian chief economist at Morgan Stanley, who correctly predicted in April 2007 that China’s equities would tumble. “We’ve seen the peak of this market cycle, though there’s likely to be a bounce as the government seeks to stabilize the market.”
The market may extend its decline by another 10 percent, Xie said Aug. 17. Even with the recent decline, the Shanghai index is trading at 30.4 times reported earnings, against 17.5 times for shares on the MSCI Emerging Markets Index.