Feeling Bearish? Try a Short Index ETF (SH) on for Size

By Brandon Clay

After the stunning rally in March, many market experts think the summer doldrums have set in and stocks may languish for the next couple of months. Second-quarter earnings may not be much help while charts for the Dow Jones Industrial Average and the S&P 500 are showing the infamous head-and-shoulders pattern. This is normally a sign that a pullback is in the offing.

With this confluence of factors, a near-term bearish bet on the broader market could pay off. ProShares Short S&P 500 ETF (SH) is one way to do it. ProShares is widely known for its large selection of leveraged ETFs. We recently mentioned their 3x offering, but SH is not leveraged. It aims for 1x the inverse daily performance of the S&P 500, making it a fine option for investors who want to profit from a downturn without taking on the risk of directly shorting stocks or buying leveraged short ETFs.

Remember the basic of short selling individual stocks: the potential for loss is unlimited. When buying put options, time decay can be a big problem. That’s why an ETF like SH can be an ideal way to profit from bearish trends. The expense ratio for SH is currently 0.95%, which is toward the bottom end of short ETFs and well below that of its leveraged peers. Recently, SH had assets of more than $1 billion.

The S&P 500 index has now closed below the critical 900 for several consecutive days and rests below both its 50-day and 200-day moving averages. The point-and-figure charts are even gloomier, indicating that 825 could be the next low point for the benchmark of large-cap U.S. stocks. Worse, volume is waning as summer drags on. That usually means more fertile ground for sellers as buyers are on the sidelines.

Every investor can benefit from a little insurance for their long positions. That’s just what ProShares Short S&P 500 is. Consider it an insurance policy that can deliver rosy returns when the market is falling. To profit from a falling market, go with SH.

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Comments

[Other:]

Tha author claims that SH is not leveraged. However a description of SH published on ETFConnect com specifically says that:" The Fund employs leveraged investment techniques in seeking its investment objective."
www.etfconnect.com/sel...

Jul 09 08:33 PM

[Ron Rowland:]

"SH is not leveraged" with respect to the index it tracks unless you consider -1x to be leveraged. The term "leveraged ETF" typically implies +2x, -2x, +3x, -3x leverage to the underlying index.

Yes, it is possible for many ETFs to "employ leverage" to reach 1x of their index while they themselves are not leveraged to that index.

If a ETF manager so chooses, and the prospectus allows, it is possible for an ETF to employ 4x leverage on 25% of its assets in order to achieve a 1x (aka non-leveraged) exposure.

Jul 09 09:05 PM

[jbonefish:]

As with the rest of the world lately, you should point out that this is intended to return the DAILY inverse. A link to the myriad of articles on the risk would be beneficial for those not familiar how these work as a short term trading vehicle.

Jul 09 11:07 PM

[Ron Rowland:]

You are correct jbonefish, SH is a "daily" -1x fund. As such, it is susceptable to long-term decay. Similar to FAS/FAZ, it will slowly lose ground to -1x of the long term return. However, unlike FAS/FAZ, where the effect as noticable after a few weeks or months, it typically takes years for the -1x effect to be noticable.

For long-term effect, look at RYURX, a -1x daily S&P 500 fund with a 15+ year track record. You will find both favorable and unfavorable periods, but the "daily" effect is greatly mitigated at "-1" versus "-2" or "-3".

It is a function of volatility, which is why the past nine months is actually the best (perhaps "worst case") example of this.

Jul 10 10:17 AM