Since the United States Presidential election, equities markets have been battered. To make matters worse, many professionals and analysts still believe earnings estimates are too high for this quarter and next. Overall, companies reporting earnings this season have delivered less than stellar results. Add to this the looming fiscal cliff which has the potential to negatively impact everyone in the United States simultaneously, and the recent short-term fears are easily explained.
These events have and the fear of the devastating fiscal cliff has exerted much pressure on markets. Further, many believe that markets were only propped up by central bank actions in the months prior as the economic data just did not support such high valuations for equity markets. It is possible that we continue to trade down in the next month and a half, possibly viciously, if there is any sign that fiscal cliff negotiations are failing. Thus, traders may want to consider taking some bearish action should market panic ensue. Those who are bearish could consider selling stock, selling covered calls on their positions, shorting stocks, buying puts or investing in a bear fund. While each of these approaches has its respective benefits and risks, in this article, I want to highlight five ETFs that have performed very well in the last month and that could provide even greater returns in the event of further market sell-offs stemming from panic.
daily investment results of 300% of the inverse of the price performance of the Russell 2000 Index (also known as the small cap index). The Russell 2000 measures the performance of the small-cap segment of the United States equity universe and consists of the smallest 2,000 companies in the Russell 3000 Index, representing approximately 10% of the total market capitalization of the Russell 3000 Index. It includes approximately 2,000 of the smallest securities based on a combination of their market cap and current index membership.
TZA actually does not invest in equity securities or stocks. What TZA does is creates short positions by investing at least 80% of its net assets in financial instruments to provide leveraged and unleveraged exposure to the Small Cap Index and the remainder in money market instruments.
TZA currently trades at $18.18 a share on average daily volume of 20 million shares. In the last month, TZA is up 25.3% compared with the ETF that tracks the Russell 2000 index (NYSEARCA:IWM), which is down 7.8%. TZA has a 52-week range of $13.35-$39.68.
daily investment results that correspond to the inverse of the daily performance of the S&P 500 index. The S&P 500 index is a measure of large cap United States stock performance. It is a capitalization weighted index of 500 United States operating companies and selected real estate investment trusts." SH attempts to invest "at least 80% of its net assets, including any borrowings for investment purposes, to investments that, in combination, have economic characteristics that are inverse to those of the index. It intends to invest assets not invested in financial instruments, in debt instruments and/or money market instruments. The Fund intends to concentrate its investments in a particular industry or group of industries to approximately the same extent as the index is so concentrated.
SH currently trades at $35.90 on approximately 3.1 million shares exchanging hands daily. SH is up 7.0% in the last month, while the S&P 500, as measured by the SPDR S&P 500 ETF (NYSEARCA:SPY), is down 6.7%. SH has a 52-week range of $33.41-$44.21.
daily investment results that correspond to twice the inverse of the daily performance of the S&P 500.
Recall the S&P 500 is:
a float-adjusted, market capitalization-weighted index of 500 United States operating companies and real estate investment trusts selected through a process that factors criteria, such as liquidity, price, market capitalization and financial viability.
SDS invests in common stock issued by public companies. SDS also invests in derivatives, which are financial instruments whose value is derived from the value of an underlying asset, interest rate or index.
SDS recently underwent a one-for-four reverse split. It currently trades near its one-year lows at $55.90 a share. SDS has average daily volume of 7.0 million shares exchanging hands. In the last month, SDS is up 14.3%, while the SPY is down 6.7%. SDS has a 52-week range of $52.12-$93.00.
Direxion Daily Mid Cap Bear 3X Shares (NYSEARCA:MIDZ): The fund seeks daily investment results, before fees and expenses, of 300% of the inverse of the performance of the S&P MidCap 400 Index. The fund normally creates short positions by investing at least 80% of its net assets in: futures contracts; options on securities, indices and futures contracts; equity caps, collars and floors; swap agreements; forward contracts; short positions; reverse repurchase agreements; ETFs; and other financial instruments. The S&P Mid Cap 400 index measures the performance of the mid-cap segment of the U.S. equity universe, which is a capitalization-weighted index composed of 400 domestic common stocks. The fund is non-diversified. The fund has a 0.95% annual expense ratio.
MIDZ currently trades at $20.54 a share. MIDZ trades with average daily volume of 100,00 shares exchanging hands. In the last month, MIDZ is up 13.9 % while the SPDR MidCap 400 ETF (MID), to which MIDZ roughly trades 300% inversely with, is down 4.8%. MIDZ has a 52-week trading range of $16.78-$26.27.
Direxion Daily S&P 500 Bear 3x ETF (SPXS): SPXS, formerly the Direxion Daily Large Cap Bear 3X fund, seeks daily investment results before fees and expenses of 300% of the inverse of the price performance of the S&P 500 Index. As with other funds, there is no guarantee the fund will meet its stated investment objective. The fund has a 1.14% annual expense ratio. Under normal circumstances, SPXS management creates short positions by investing at least 80% of its net assets in: futures contracts; options on securities, indices and futures contracts; equity caps, collars and floors; swap agreements; forward contracts; short positions; reverse repurchase agreements; ETFs; and other financial instruments that, in combination, provide leveraged and unleveraged exposure to the S&P 500.
SPXS currently trades at $19.96 a share. SPXS has average daily volume of 1.5 million shares exchanging hands. In the last month, SPXS is up 22.1 % while the SPY is down 6.7%. SPXS has a 52-week trading range of $16.07-$39.26.
There are lots of ways to position accordingly for market panic and sustained bear markets including selling covered calls, buying puts, shorting stocks and stock indices, or just plain old selling equities to raise cash. While central bank action had once bolstered markets, mediocre earnings reports, turmoil in Europe, the United States Presidential election outcome and the looming fiscal cliff have and will continue to dictate the direction of the market. Should negotiations on the fiscal cliff fail, the aforementioned funds will perform very well as the market will inevitably sell-off. As we approach the fiscal cliff deadline, it is likely we will see large swings in the markets based on headlines. On those negative days, consider picking up one of these funds to profit from the panic.
Disclosure: I am long TZA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Disclaimer: I am not recommending investors to be bullish, bearish or neutral. This article is for informational purposes only and highlights funds one can consider in the event or anticipation of short-term panic and bearishness. It is not a recommendation to buy or sell any of the aforementioned assets. Rather it is a recommendation to consider them in the event of sell-offs, in addition to the myriad of other options to position a portfolio as discussed.