7 ETFs to Short Right Now 33 comments
-
Font Size:
-
Print
- TweetThis
There is no joy -- and no value -- in the markets of Mudville. There’s hype a-plenty. Arrogance run amok. And overconfidence enough. But no value.
For all these reasons, enumerated in recent articles on Seeking Alpha …
- There is a $500 billion to $1 trillion overhang of one-sided selling hanging over the market from hedge funds alone (see article here);
- Earnings at US companies are plummeting, a fact partially obscured by the “less-bad must equal good” hogwash (see article here);
- Bankers and brokers have manipulated the news and manufactured false numbers in order to foist $85 billion in new equity on an unsuspecting public (see article here);
- The numbers reported by government bureaucrats for unemployment, inflation, housing, and every other key indicator are fudged, revised, and heuristically-derived so as to render them worthless (see article here); and
- $13 trillion (in borrowed or newly-printed money) says the value of the US dollar will inevitably plunge, further reducing anything we own denominated in dollars (see article here).
… I can no longer find pockets of value in which to invest. When I run out of investments that offer value for my investing dollar, I conclude it is one of those rare occasions when I do better for myself and our clients by seeking short positions.
Here are 7 I think merit shorting right now:
- Direxion Daily Large Cap Bull 3x Shares – BGU
- Direxion Daily Developed Markets Bull 3x Shares – DZK
- Direxion Daily Emerging Markets Bull 3x Shares -- EDC
- Direxion Daily Small Cap Bull 3x Shares – TNA
- Direxion Daily Financial Bull 3x Shares -- FAS
- SPDR S&P BRIC 40 -- BIK
- iShares MSCI BRIC Index Fund – BKF
I recommend only small positions in these ETFs. All are volatile. The first 5 are all triple-leveraged funds, which use derivatives to increase leverage. A $1 daily move in the underlying index results in somewhere around a $3 profit or loss for you that day. Caveat emptor! Leverage cuts both ways. The most I would place in these 7 ETFs is 10% of your portfolio.
BGU looks to achieve daily investment results of 300% of each day’s price performance of the Russell 1000 (Large Cap US) Index, which includes the 1,000 largest securities based on a combination of their market cap and current index membership.
DZK looks for daily investment results of 300% of each day’s price performance of the MSCI EAFE Index, a free float-adjusted market capitalization index that tracks developed market equity performance, ex the US and Canada.
EDC is to emerging markets what DZK is to developed markets, seeking daily investment results of 300% of each day’s price performance of the MSCI Emerging Markets Index, a free float-adjusted market cap index designed to measure the global emerging markets.
TNA strives for daily investment results of 300% of each day’s price performance of the Russell 2000 (Small Cap) Index, which the smallest 2,000 companies in the Russell 3000 Index, measured by market cap and current index membership
FAS seeks daily investment results of 300% of each day’s price performance of the Russell 1000 Financial Services Index, a capitalization-weighted index of companies that provide financial services. (If you want to call gouging and usury “financial services,” but I digress!)
Unlike the 5 above, the remaining two use no leverage – but their choice of investment sector, the BRIC nations, is volatile enough without it.
BIK looks to replicate as closely as possible the total return performance of the S&P BRIC 40 Index. The index is designed to measure the type of returns foreign portfolio investors might receive from investing in emerging market stocks that are “legally and practically available to them.”
Finally, BKF tries to provide investment results that correspond to the price and yield performance of the MSCI BRIC Index, a free float-adjusted market capitalization index that is designed to measure the combined equity market performance in Brazil, Russia, India and China (BRIC). The Index consists of stocks traded primarily on the Sao Paolo Stock Exchange, Russian Trading System Stock Exchange, Moscow Interbank Currency Exchange, National Stock Exchange of India and the Stock Exchange of Hong Kong. It is more a “pure play” on the BRIC nations than BIK, but both should move in the same direction and with “roughly” the same volatility.
This dearth of value, too, shall pass. Until it does, we’ll stay short. When that changes, we’ll be buying our usual value holdings with both hands…
DISCLOSURE: Short BGU, FAS and BIK. Looking to short the others if they rally a bit from here.
Related Articles
|
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication
Seeking Alpha 100 » -
Fastest Climbers
Authors with the largestSee all
increase in followers
in the last 7 days
Fastest Climbers » -
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most active
Instabloggers.-
1
TraderMark
-
2
Don Dion
-
3
Cliff Wachtel
-
4
Mike Havrilla
-
5
James Quinn
Top Instabloggers » -
1
-
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
This article has 33 comments:
I understand your analysis and why you might want to short the market. I am curious as to to why you would short instead of buying the reverse ETF's such as the FAZ instead of the FAS?
My second question is to your market allocation. Did you pick 10% because with triple exposure its the same as risking 30% of your portfolio or are you scaling in to these shorts?
Thanks for the series of articles. It is good to be able to read and analyze differing points of view. As a long term investor in China and America it always worries me that another down leg is coming. However, creating a negative position by using reverse ETF's certainly can cushion the blow and not require one to sell certain cornerstone holdings.
seekingalpha.com/artic...
...given the S&P 500 has gone up 160 points since then, one might consider whether his opinion is a good "contrary" indicator.
Let me answer your question. Leveraged ETFs are subject to value erosion over time. In other words, they slowly decay, losing their value, even if underlying index goes sideways. By going long, you will have time decay working against you. By shorting, you will get benefits of the favorable market movements and time decay.
If the individual had actually read the article, rather than just find one headline he didn’t like, he would have seen the article concluded with these exact words:
“We will sell 50% of all if/as the market rises toward 8500 or so and will sell more if it goes to the 9000 area. We will also place our first limit order for the first of the inverse ETFs we plan to buy: EEV at a limit of 36.”
In fact, we sold most everything a little earlier. By selling between 8000 and 8500, however, we enjoyed most of the rally. (In our Investor’s Edge ® portfolio, we sold many positions “too early.” But having made outsized profits from our bank preferreds – also a matter of record – we are still well above the returns of the S&P this year.) We’re not piggish. We don’t mind selling some // positions // too early, as long as we are solidly profitable on the // portfolio. //
I can cite a number of // positions // that didn’t pan out. Only liars, scoundrels, and rearview-mirror snipers bat a thousand on every position. But as long as we beat the averages every year since we set up our model // portfolios // in 1998, I reckon we’ll keep doing what we’re doing !
On Jun 04 07:43 AM raytayzmd wrote:
> ...of course, on March 30, Joe was advising everyone not to be an
> "April Fool":
>
> seekingalpha.com/artic...
>
>
> ...given the S&P 500 has gone up 160 points since then, one might
> consider whether his opinion is a good "contrary" indicator.
... I am curious as to to why you would short instead of buying the reverse ETF's such as the FAZ instead of the FAS?
...My second question is to your market allocation. Did you pick 10% because with triple exposure its the same as risking 30% of your portfolio or are you scaling in to these shorts?
JS: Futurist, I see a fellow reader has already answered question 1 -- I couldn't answer any better! Given the time decay and daily bias, in this case I believe we'll do better by shorting.
And you drew the right conclusion on question 2 yourself. I believe these are volatile //enough// without placing more in the portfolio. We effectively get a triple hedge for the price of a single position. XLNT questions, thanks!
blog.quantumfading.com.../
In practice, I can assure you that SSO does decay over time vs. the S&P, however it's made me enought money that so far I haven't really cared. Now I may change my strategy.
PS -- I like your call sign, VP of Common Sense...
Joe
On Jun 04 10:58 AM VP of Common Sense wrote:
> I forgot the overriding effect of being short, which is the maximum
> gain is 100% unless one expands their position regularly.
What do you recommend for big bets?
On Jun 04 11:02 AM Baboon wrote:
> >I recommend only small positions in these ETFs.
>
> What do you recommend for big bets?
For a longer term hold than shorting is the way to go because of the built-in decay. So if you think the banks are going up over a period, then short FAZ, for an example.
Trouble is, I don't know who will want to be counterparty to such a trade and accept it. If you do, pleeeese ... tell me!
ALERT: We have exited all long crude oil swing trade positions based on our "Trade Triangle" technology.
You can find these buy/sell signals @ tinyurl.com/pdsrmp
crudeoiltrader.blogspo...
The decay factor will probably keep me from using these funds as a hedging tool. They are helpful for short term trading though.
IWM +149%
IWM 3x Bull +941%
IWM 3x Bear -97%
www.quantumfading.com/...
On Jun 04 09:26 AM Joseph L. Shaefer wrote:
> Most dialogue on SA, certainly among our regular readers, is constructive and thought-provoking. Every now and then, I receive some drive-by sniping like this, however!
If the individual had actually read the article, rather than just find one headline he didn’t like, he would have seen the article concluded with these exact words...
JS
On Jun 04 04:29 PM raytayzmd wrote:
> ....there's an easy solution to such skepticism...there are now several
> websites where you can actually manage a hypothetical portfolio and
> record trades for everyone to see...one example I can think of is
> "covestor.com"...that's the surest way to trim doubt and collect
> true believers...but, oddly enough, hardly anyone selling investment
> advice ever do that...I wonder why....
On Jun 04 02:22 PM Futurist wrote:
> I appreciate everyones information as to the "decay" factor in highly
> leveraged funds. I am aware of this fact but have not found a mathematical
> distinction between the decay of negative funds or positive funds.
> In fact I am quite amazed that shorting both type of funds at the
> same moment has been the perfect long term investment. Now whether
> that can continue during a bull market is yet to be seen.
> The decay factor will probably keep me from using these funds as
> a hedging tool. They are helpful for short term trading though.
I am not a big fan of leveraged funds.Why would I want to take on twice as much risk and pay a hefty ER to do so?
Of course, you are NOT recommending going long on these ETFs, instead you recommend shorting these leveraged ETFs. That makes sense. I am not a big fan of shorting either. Your potential for loss is unlimited. Your potential for gain is limited. Just too much unnecessary risk in a overly risky market.
I don't understand your recommendation to short of the BRIC ETFs. Long BRIC ETFs are the most volatile asset class out there. Proper asset allocation / prudent diversification dictates some allocation to Emerging Markets. While BRIC has recently run up, and may be indeed overbought, these could well emerge to be the healthiest economies out there.
Im always in awe of what crazy ETF scheme people can come up with on this site..................... sir, take the cake!
Joe - Excellent article.
... I am not a big fan of shorting either. Your potential for loss is unlimited...
...While BRIC has recently run up, and may be indeed overbought, these could well emerge to be the healthiest economiesout there.
Living4Dividends,
Thank you for your literate and thoughtful response. In 40 years of investing and being an industry professional, I have seldom shorted. It takes a major confluence of events and a sense that the “sudden volume” all on the buy side at the end of every day and the clear manipulation of news and numbers is happening for a reason. I believe that reason is to pull in unsuspecting investors, who wouldn’t touch banks and brokers just two months ago, and convince them to buy over $100 billion of new equity, allowing TARP loans to be repaid, bonuses to be reinstated, the government to declare their plan a success, and the pain to be spread, as usual, among the common stock investors.
As for shorting the BRICs, I don’t want to confuse their “prospects” for growth with their “timeline” of growth. They will clearly be an engine for global growth (though I’d rather play that growth via established firms domiciled in representative capitalist democracies with good corporate governance and minimal red tape. You’re welcome to check my article, “Looking to Buy BRIC? The ‘ABC’s are Better” for my full rationale…) I believe the share prices of virtually all companies comprising the ETFs in question are now priced for perfection. They have gotten far ahead of their potential to surprise on the upside and well within the range that any brief stumble will result in a massive outflow of investment.
Joe
If one really wants to embark on shorting these market segments, buy at-the-money put options on the unlevered ETFs (using options provides some leverage) or across-the-money bear put spreads (for more leverage), and pick your expiration based on when you think the comeuppance is coming.
Personally, I think you'd be better off shorting long-dated Treasuries.
Roh - How do you physically short Treasuries? And you can't say "Buy such and such ETF" Those ETFs do not short Treasuries, they merely buy futures betting on the Treasuries decline.
I would love to find a way to short Treasuries (if it is legal)
On Jun 05 02:50 PM long roh wrote:
> Personally, I think you'd be better off shorting long-dated Treasuries.
But I also believe that after the next punch to the Upside, you might see these levels revisited.
I'll concede that retail investors can't *directly* short treasuries as a practical matter. But I don't follow your comment about short ETFs. You wrote: "Those ETFs do not short Treasuries, they merely buy futures betting on the Treasuries decline." Actually, they sell futures contracts betting on the Treasuries decline. You can rest assured that those futures markets do affect the prices in the actual market for Treasuries, so I'm not sure why you'd pooh-pooh futures or ETFs constructed with futures.
Falling Trend:
Index/Stock 11/5/08 3/6/09 Gain/Loss
RUSSEL1000 513.27 371.22 -27.7%
BGU 50.91 15.11 -70.3%
Rising Trend:
Index/Stock 3/9/09 6/12/09 Gain/Loss
RUSSEL1000 367.55 516.95 40.6%
BGU 14.60 37.32 155.6%
Sideway Trend:
Index/Stock 6/1/09 6/12/09 Gain/Loss
RUSSEL1000 515.49 516.95 0.3%
BGU 36.95 37.32 1.0%
The last two weeks have been pretty flat, so I used them in the comparison. It data doesn't support the value decay theory. But I must admit the data is limited and more study may be needed. In addition, I am in no way an expert in the stock market or statistics.
Any thoughts?
Steve