As the markets have become increasingly unstable this year (2011), educating/re-educating my clients on strategies to trade against the market has become essential.
Some like using options, which offer versatility, liquidity, leverage, and, most importantly in our case, the ability to bet against an equity. But there is some in-depth knowledge required when executing an options trade, knowledge that is above and beyond what is required to simply buy and sell stocks/ETFs. Because of this, though options are a wonderful and versatile trading tool, they're not for everybody.
The next choice is shorting. Shorting stocks/ETFs can be a very useful trading tool as well, but this trading method comes with some risk. Shorting requires the use of margin. Margin can be a great thing when investing; allowing the investor financial leverage, but the stock market is a finicky place. Leverage or no, the risk of using margin when trading stocks is, in my opinion, unnecessarily high. (I would rather recommend using the leverage offered by options.) Also, shorting a stock leaves the trader open to unlimited risk. For example, if we were to enter a long position (i.e. purchase a stock) the maximum amount of risk we take on is our total capital investment in that stock. If the stock plummets to zero we lose all of our money; not fun, but it actually could be worse. If we were to short a stock (i.e. sell a stock with the promise of buying that stock back and repaying the debt) the stock could spike infinitely (not probable, but possible). Since we have to repay the stock regardless, our risk, the price at which we must purchase the stock, is, therefore, limitless. (When using margin the trader is also subject to interest payment on any margin used.)
For the clients of mine who do not short stocks or trade options I recommend using inverse ETFs (a.k.a. short ETFs or bear ETFs). Inverse ETFs allow the trader to bet against the market without the secondary knowledge and vocabulary required to trade options nor the risk associated with shorting. Yes, inverse ETFs are limited and only allow the trader the ability to trade against a broad market, sector, commodity, etc. but they are simple, straight-forward and trade just like (long) stocks or ETFs.
An example of the usefulness in using inverse ETFs to bet against the market instead of shorting or trading options can be found by looking at gold earlier this year (2011). As the markets became volatile in August, gold began to climb at an impressive rate. But most knew that, sooner or later, gold would run out of steam. As gold started to lose momentum, wise investors began shorting, buying put options, and purchasing inverse gold ETFs like PowerShares DB Gold Short ETN (DGZ) and PowerShares DB Gold Double Short ETN (DZZ). As you can see by the graph below, purchasing an inverse gold ETF like PowerShares DB Gold Short ETN in late August would have produced significant short term returns on gold's fall from the top.
(Please note that, historically, gold is a strong long term investment. This example, therefore, is only intended for use in a short term scenario.)
Click on graphs below to enlarge:
Inverse ETFs can also be used to better analyze a potential reversal in trend or other major market movement, resistance, support, etc. For example, ProShares UltraShort S&P500 (SDS), an ETF that moves inversely to the S&P 500 at twice the leverage, has continuously used the $19.50 price level as support over its trailing 52-week range. This $19.50 price level can be interpreted as a level of support for SDS and, therefore, a place of resistance for the S&P 500. In other words, the S&P 500 seems to lose positive momentum when SDS nears the $19.50 price level. Conversely, if/when SDS breaks below $19.50, this could translate to the beginning of a major shift in our markets and a significant increase in overall investor confidence.
In conclusion, whether you are hedging long positions or trading against the market, inverse ETFs can be a wonderful trading tool when used properly. Below is a table of inverse ETFs categorized by asset class and index. This table can also be viewed here.
| Assett Class | Tracks | Symbol | Name | Leverage | Inverse to | Avg Volume |
| Alter-natives | S&P 500 VIX 2-Month Futures Index ER | BBVX | ETRACS DAily Short 2-Month S&P 500 VIX Futures ETN due September 6, 2041 | 1x | n/a | 9,710 |
| S&P 500 VIX 3-Month Futures Index ER | CCVX | ETRACS Daily Short 3-Month S&P 500 VIX Futures ETN due September 6, 2041 | 1x | n/a | 5,310 | |
| S&P 500 VIX 4-Month Futures Index ER | DDVX | ETRACS Daily Short 4-Months S&P 500 VIX Futures ETN due September 6,2041 | 1x | n/a | 2,810 | |
| S&P 500 VIX 6-Month Futures Index ER | FFVX | ETRACS Daily Short 6-Month S&P 500 VIX Futures ETN due September 6, 2041 | 1x | n/a | 1,470 | |
| S&P 500 VIX Mid-Term Futures Index Excess Return | EEVX | ETRACS Daily Short 4-Months S&P 500 VIX Futures ETN due September 6,2041 | 1x | n/a | 1,670 | |
| S&P 500 VIX Mid-Term Futures Index Excess Return | ZIV | VelocityShares Daily Inverse VIX Medium-Term ETN | 1x | n/a | 18,131 | |
| S&P 500 VIX Short-Term Futures Index | SVXY | Short VIX Short-Term Futures ETF | 1x | n/a | 51,080 | |
| S&P 500 VIX Short-Term Futures Index Excess Return | XIV | VelocityShares Daily Inverse VIX Short-Term ETN | 1x | n/a | 9,143,481 | |
| S&P 500 VIX Short-Term Futures Index Excess Return | XXV | Barclays ETN Inverse S&P 500 VIX Short-Term Futures ETN | 1x | n/a | 175,230 | |
| S&P 500 VIX Short-Term Futures Index Excess Return | IVOP | Inverse S&P 500 VIX Short-Term Futures ETN (II) Profile | 1x | n/a | 35,260 | |
| S&P 500 VIX Short-Term Futures Index Excess Return | AAVX | ETRACS 4-Month S&P 500 VIX Futures ETN due SEptermber 6, 2041 | 1x | n/a | 12,330 | |
| Bond | Barclays Capital U.S. 20+ Year Treasury Index | TBT | ProShares UltraShort 20 Year Treasury | 2x | UBT | 10,052,627 |
| Barclays Capital 10 Year U.S. Treasury Futures Targeted Exposure Index | DTYS | US Treasury 10-year Bear Exchange Traded Note | 1x | DTYL | 20,313 | |
| Barclays Capital 2 Year U.S. Treasury Futures Targeted Exposure Index | DTUS | US Treasury 2-year Bear Exchange Traded Note | 1x | DTUL | 3,820 | |
| Barclays Capital 5Y US Treasury Futures Targeted Exposure Index | DFVS | iPath US Treasury 5-year Bear Exchange Traded Note | 1x | n/a | 1,232 | |
| Barclays Capital Long Bond Futures Targeted Exposure Index | DLBS | US Treasury Long Bond Bear Exchange Traded Note | 1x | DLBL | 39,117 | |
| Barclays Capital U.S. 20+ Year Treasury Index | TBF | ProShares Short 20 Year Treasury | 1x | n/a | 626,608 | |
| Barclays Capital U.S. 3-7 Year Treasury Bond Index | TBZ | ProShares UltraShort 3-7 Year Treasury | 2x | n/a | 871 | |
| Barclays Capital U.S. 7-10 Year Treasury Index | PST | ProShares UltraShort 7-10 Year Treasury | 2x | UST | 156,159 | |
| Barclays Capital U.S. 7-10 Year Treasury Index | TBX | ProShares Short 7-10 Year Treasury | 1x | n/a | 9,394 | |
| Barclays Capital U.S. Aggregate Bond Index | SAGG | Direxion Daily Total Bond Market Bear 1x Shares | 1x | n/a | 15,924 | |
| Barclays Capital U.S. Treasury 2 Year/10 Year Yield Curve Index | FLAT | US Treasury Flattener Exchange Traded Note | 1x | n/a | 41,044 | |
| Barclays Capital U.S. Treasury Inflation Protected Securities (TIPS) Index (Series-L) | TPS | ProShares UltraShort TIPS | 2x | n/a | 2,769 | |
| DB USD JGB Futures Index | JGBD | PowerShares DB 3x Inverse Japanese Govt Bond Future | 3x | n/a | 1,160 | |
| DB USD JGB Futures Index | JGBS | PowerShares DB Inverse Japanese Govt Bond Future | 1x | n/a | 750 | |
| Deutsche Bank Short U.S. Treasury Bond Futures Index | SBND | PowerShares DB 3x Short 25 Year Treasury Bond Exchange Traded Notes | 3x | LBND | 94,313 | |
| iBoxx $ Liquid High Yield Index | SJB | ProShares Short High Yield | 1x | n/a | 118,802 | |
| iBoxx $ Liquid Investment Grade Index | IGS | ProShares Short Investment Grade Corporate | 1x | n/a | 2,218 | |
| NYSE 20 Year Plus Treasury Bond Index | TMV | Direxion Daily 30-Year Treasury Bear 3X | 3x | TMF | 349,133 | |
| NYSE 20 Year Plus Treasury Bond Index | TYBS | Direxion Daily 20 Year Treasury Bear 1x Shares | 1x | n/a | 718 | |
| NYSE 7-10 Year Treasury Bond Index | TYO | Direxion Daily 10-Year Treasury Bear 3X | 3x | TYD | 29,913 | |
| NYSE 7-10 Year Treasury Bond Index | TYNS | Direxion Daily 7-10 Year Treasury Bear 1x Shares | 1x | n/a | 1,000 | |
| NYSE US 10 Year Treasury Futures Index | DSXJ | JPMorgan Double Short US 10 Year Treasury Futures ETNs | 2x | n/a | 4,542 | |
| NYSE US Long Bond Treasury Futures Index | DSTJ | JPMorgan Double Short US Long Bond Treasury Futures ETNs | 2x | n/a | 1,794 | |
Com- modity | Deutsche Bank Liquid Commodity Index | DDP | DB Commodity Short ETN | 1x | DPU | 19,083 |
| Deutsche Bank Liquid Commodity Index | DEE | DB Commodity Double Short ETN | 2x | DYY | 3,304 | |
| Deutsche Bank Liquid Commodity Index-Oil | DTO | PowerShares DB Crude Oil Double Short ETN | 2x | n/a | 441,544 | |
| Deutsche Bank Liquid Commodity Index-Oil | SZO | PowerShares DB Crude Oil Short ETN | 1x | OLO | 16,413 | |
| Deutsche Bank Liquid Commodity Index-Optimum Yield Agriculture | AGA | DB Agriculture Double Short ETN | 2x | DAG | 20,947 | |
| Deutsche Bank Liquid Commodity Index-Optimum Yield Agriculture | ADZ | DB Agriculture Short ETN | 1x | AGF | 2,388 | |
| Deutsche Bank Liquid Commodity Index-Optimum Yield Gold | DZZ | DB Gold Double Short ETN | 2x | DGP | 4,385,958 | |
| Deutsche Bank Liquid Commodity Index-Optimum Yield Gold | DGZ | DB Gold Short ETN | 1x | DGL | 313,203 | |
| Deutsche Bank Liquid Commodity Index-Optimum Yield Industrial Metals | BOM | PowerShares DB Base Metals Double Short ETN | 2x | BDD | 74,098 | |
| Deutsche Bank Liquid Commodity Index-Optimum Yield Industrial Metals | BOS | PowerShares DB Base Metals Short ETN | 1x | BDG | 33,928 | |
| Dow Jones-UBS Commodity Index | CMD | ProShares UltraShort DJ-UBS Commodity | 2x | UCD | 9,225 | |
| Dow Jones-UBS Crude Oil Sub-Index | SCO | ProShares UltraShort DJ-UBS Crude Oil | 2x | UCO | 1,314,841 | |
| Dow Jones-UBS Natural Gas Subindex | KOLD | UltraShort DJ-UBS Natural Gas | 2x | n/a | 11,144 | |
| Gold bullion | GLL | ProShares UltraShort Gold | 2x | UGL | 1,459,109 | |
| Light, sweet crude oil | DNO | US Short Oil Fund | 1x | USO | 28,900 | |
| S&P GSCI Gold Index ER | DGLD | VelocityShares 3x Inverse Gold ETN linked to the S&P GSCI Gold Index Excess Return | 3x | n/a | 3,872 | |
| S&P GSCI Palladium Index ER | IPAL | VelocityShares 2x Inverse Palladium ETN linked to the S&P GSCI Palladium Index ER | 2x | n/a | n/a | |
| S&P GSCI Platinum Index ER | IPLT | VelocityShares 2x Inverse Platinum ETN linked to the S&P GSCI Platinum Index ER | 2x | n/a | 543 | |
| S&P GSCI Silver Index ER | DSLV | VelocityShares 3xInverse Silver ETN linked to the S&P GSCI Silver Inverse Index ER | 3x | n/a | 35,266 | |
| Silver bullion | ZSL | ProShares UltraShort Silver | 2x | AGQ | 10,073,297 | |
| UBS Bloomberg CMCI Platinum Excess Return | PTD | UBS E-TRACS CMCI Short Platinum Excess Return ETN | 1x | PTM | 960 | |
| Currency | Deutsche Bank Long U.S. Dollar Index Futures Index - Excess Return | UDNT | PowerShares DB 3x Short US Dollar Index Futures Exchange Traded Notes | 3x | n/a | 2,481 |
| Deutsche Bank Short US Dollar Index (USDX) Futures Index | UDN | PowerShares DB US Dollar Bearish Fund | 1x | UUP | 185,877 | |
| Double Short Euro Index | DRR | Market Vectors Double Short Euro ETN | 2x | URR | 79,925 | |
| Euro | EUO | ProShares UltraShort Euro | 2x | ULE | 5,113,944 | |
| Japanese Yen | YCS | ProShares UltraShort Yen | 2x | YCL | 293,995 | |
| Equity | Alerian MLP Infrastructure Total Return Index | MLPS | E-TRACS 1xMonthly Short Alerian MLP Infrastructure Total Return ETN | 1x | MLPI | 4,200 |
| Bank of New York Mellon BRIC Select ADR Index | BRIS | Direxion Daily BRIC Bear 2X Shares | 2x | BRIL | 2,211 | |
| Bank of New York Mellon China Select ADR Index | YANG | Direxion Daily China Bear 3X ETF | 3x | n/a | 62,730 | |
| DAXglobal Agribusiness Index | COWS | Daily Agribusiness Bear 3x Shares | 3x | n/a | 8,686 | |
| DAXglobal Russia Index | RUSS | Daily Russia Bear 3x Shares | 3x | n/a | 27,472 | |
| Dow Jones Industrial Average | SDOW | ProShares UltraPro Short Dow 30 Fund | 3x | UDOW | 1,039,270 | |
| Dow Jones Industrial Average Index | DXD | ProShares UltraShort Dow 30 | 2x | DDM | 4,814,084 | |
| Dow Jones Industrial Average Index | DOG | Short Dow 30 Proshares | 1x | n/a | 931,634 | |
| Dow Jones U.S. Basic Materials Index | SMN | ProShares UltraShort Basic Materials | 2x | UYM | 1,598,292 | |
| Dow Jones U.S. Basic Materials Index | SBM | ProShares Short Basic Materials | 1x | n/a | 29,143 | |
| Dow Jones U.S. Consumer Goods Index | SZK | ProShares UltraShort Consumer Goods | 2x | UGE | 4,994 | |
| Dow Jones U.S. Consumer Services Index | SCC | ProShares UltraShort Consumer Services | 2x | UCC | 29,750 | |
| Dow Jones U.S. Financials Index | SKF | ProShares UltraShort Financials | 2x | UYG | 2,542,455 | |
| Dow Jones U.S. Financials Index | SEF | ProShares Short Financials | 1x | n/a | 347,445 | |
| Dow Jones U.S. Health Care Index | RXD | ProShares UltraShort Health Care | 2x | RXL | 3,531 | |
| Dow Jones U.S. Industrials Index | SIJ | ProShares UltraShort Industrials | 2x | UXI | 14,583 | |
| Dow Jones U.S. Oil & Gas Index | DUG | ProShares UltraShort Oil & Gas | 2x | DIG | 2,070,267 | |
| Dow Jones U.S. Oil & Gas Index | DDG | Short Oil and Gas Proshares | 1x | n/a | 15,856 | |
| Dow Jones U.S. Select Telecommunications Index | TLL | ProShares UltraShort Telecommunications | 2x | LTL | 3,300 | |
| Dow Jones U.S. Semiconductors Index | SSG | ProShares UltraShort Semiconductors | 2x | USD | 51,133 | |
| Dow Jones U.S. Technology Index | REW | ProShares UltraShort Technology | 2x | ROM | 22,411 | |
| Dow Jones U.S. Utilities Index | SDP | ProShares UltraShort Utilites | 2x | UPW | 7,273 | |
| FTSE/Xinhua China 25 Index | FXP | ProShares UltraShort FTSE China 25 | 2x | XPP | 631,697 | |
| FTSE/Xinhua China 25 Index | YXI | ProShares Short FTSE China 25 | 1x | n/a | 20,278 | |
| Health Care Select Sector Index | SICK | Daily Healthcare Bear 3X Shares | 3x | n/a | 623 | |
| Indus India Index | INDZ | Direxion Daily India Bear 2X Shares | 2x | INDL | 4,647 | |
| ISE-REVERE Natural Gas Index | GASX | Direxion Daily Natural Gas Related Bear 2x ETF | 2x | n/a | 9,389 | |
| KBW Regional Banking Index | KRS | ProShares Short KBW Regional Banking | 1x | n/a | 32,691 | |
| Materials Select Sector Index | MATS | Daily Basic Materials Bear 3X Shares | 3x | n/a | 12,043 | |
| MSCI Brazil Index | BZQ | ProShares UltraShort MSCI Brazil | 2x | UBR | 167,516 | |
| MSCI EAFE Index | EFZ | Short MSCI EAFE Proshares | 1x | n/a | 379,609 | |
| MSCI EAFE Index | EFU | ProShares UltraShort MSCI EAFE | 2x | EFO | 172,983 | |
| MSCI EAFE Index | DPK | Developed Markets Bear 3x Shares | 3x | DZK | 106,459 | |
| MSCI EAFE Index | MFSA | iPath Short Enhanced MSCI EAFE Index ETN | 2x | MFLA | 759 | |
| MSCI Emerging Markets Index | EUM | Short MSCI Emerging Markets Proshares | 1x | n/a | 388,883 | |
| MSCI Emerging Markets Index | EDZ | Emerging Markets Bear 3x Shares | 3x | EDC | 3,221,703 | |
| MSCI Emerging Markets Index | EEV | ProShares UltraShort MSCI Emerging Markets | 2x | EET | 651,305 | |
| MSCI Emerging Markets Index | EMSA | iPath Short Enhanced MSCI Emerging Markets Index ETN | 2x | EMLB | 3,708 | |
| MSCI Europe Index | EPV | ProShares UltraShort MSCI Europe | 2x | UPV | 374,830 | |
| MSCI Japan Index | EWV | ProShares UltraShort MSCI Japan | 2x | EZJ | 14,452 | |
| MSCI Mexico Investable Market Index | SMK | ProShares UltraShort MSCI Mexico Investable Market | 2x | UMX | 5,545 | |
| MSCI Pacific ex-Japan Index | JPX | ProShares UltraShort MSCI Pacific ex-Jpn | 2x | UXJ | 1,184 | |
| MSCI US Broad Market Index | TOTS | Daily Total Market Bear 1X Shares | 1x | n/a | 1,597 | |
| NASDAQ Biotechnology Index | BIS | ProShares UltraShort Nasdaq Biotechnology | 2x | BIB | 2,066 | |
| NASDAQ-100 Index | QID | ProShares UltraShort QQQ | 2x | QLD | 8,613,034 | |
| NASDAQ-100 Index | PSQ | Short QQQ Proshares | 1x | n/a | 1,347,669 | |
| NASDAQ-100 Index | SQQQ | ProShares UltraPro Short QQQ Fund | 3x | TQQQ | 3,139,936 | |
| None | HDGE | AdvisorShares Active Bear ETF | 1x | n/a | 237,813 | |
| NYSE Arca Gold Miners Index | DUST | Direxion Daily Gold Miners Bear 2x Shares | 2x | NUGT | 243,422 | |
| PHLX Semiconductor Index | SOXS | Direxion Daily Semiconductor Bear 3X Shares | 3x | SOXL | 171,298 | |
| Russell 1000 Energy Index | ERY | Daily Energy Bear 3x Shares | 3x | ERX | 5,191,239 | |
| Russell 1000 Financial Services Index | FAZ | Direxion Financial Bear 3X Shares | 3x | FAS | 22,600,787 | |
| Russell 1000 Growth Index | SFK | ProShares UltraShort Russell 1000 Growth | 2x | UKF | 18,440 | |
| Russell 1000 Index | BGZ | Direxion Large Cap Bear 3X Shares | 3x | BGU | 4,050,303 | |
| Russell 1000 Index | ROSA | iPath Short Extended Russell 1000 TR Index ETN | 3x | ROLA | 2,309 | |
| Russell 1000 Retail Index | RETS | Direxion Daily Retail Bear 2x Shares | 2x | RETL | 5,108 | |
| Russell 1000 Technology Index | TYP | Direxion Daily Technology Bear 3X Shares | 3x | TYH | 936,638 | |
| Russell 1000 Value Index | SJF | ProShares UltraShort Russell 1000 Value | 2x | UVG | 3,044 | |
| Russell 2000 Growth Index | SKK | ProShares UltraShort Russell 2000 Growth | 2x | UKK | 19,630 | |
| Russell 2000 Index | TZA | Direxion Small Cap Bear 3X Shares 2013 Russell 2000 | 3x | TNA | 30,642,979 | |
| Russell 2000 Index | RWM | Short Russell 2000 Proshares | 1x | n/a | 2,576,661 | |
| Russell 2000 Index | TWM | ProShares UltraShort Russell 2000 | 2x | UWM | 5,786,022 | |
| Russell 2000 Index | SRTY | ProShares UltraPro Short Russell2000 Fund | 3x | URTY | 1,473,805 | |
| Russell 2000 Index | RTSA | iPath Short Extended Russell 2000 TR Index ETN | 3x | RTLA | 18,991 | |
| Russell 2000 Value Index | SJH | ProShares UltraShort Russell 2000 Value | 2x | UVT | 6,025 | |
| Russell 3000 Index | TWQ | ProShares UltraShort Russell 3000 | 2x | UWC | 5,895 | |
| Russell MidCap Growth Index | SDK | ProShares UltraShort Russell MidCap Growth | 2x | UKW | 2,927 | |
| Russell Midcap Index | MWN | Direxion Daily Mid Cap Bear 3x Shares | 3x | MWJ | 50,984 | |
| Russell MidCap Value Index | SJL | UltraShort Russell Mid Cap Value Proshares | 2x | UVU | 2,785 | |
| S&P 500 Bull/TBond Bear Index | FSA | FactorShares 2X: TBond Bull/S&P500 Bear | 2x | n/a | 2,039 | |
| S&P 500 Index | SH | Short S&P 500 Proshares | 1x | n/a | 8,447,722 | |
| S&P 500 Index | SDS | ProShares UltraShort S&P 500 | 2x | SSO | 44,456,961 | |
| S&P 500 Index | SPXU | ProShares UltraPro Short S&P 500 | 3x | UPRO | 17,296,178 | |
| S&P 500 Index | RSW | Rydex Inverse 2x S&P 500 ETF | 2x | RSU | 121,478 | |
| S&P 500 Index | SFSA | iPath Short Extended S&P 500 TR Index ETN | 3x | SFLA | 28,417 | |
| S&P 500 Total Return Index | BXDB | Barclays Short B Leveraged Inverse S&P 500 Total Return Index | 1x | n/a | 2,781 | |
| S&P 500 Total Return Index | BXDC | Barclays Short C Leveraged Inverse S&P 500 Total Return Index | 2x | BXUC | 9,113 | |
| S&P Latin America 40 Index | LHB | Direxion Daily Latin America Bear 3x Shares | 3x | LBJ | 39,345 | |
| S&P MidCap 400 Index | MZZ | ProShares UltraShort MidCap400 | 2x | MVV | 347,398 | |
| S&P MidCap 400 Index | MYY | Short MidCap 400 Proshares | 1x | n/a | 131,892 | |
| S&P MidCap 400 Index | SMDD | ProShares UltraPro Short Mid Cap 400 Fund | 3x | UMDD | 251,167 | |
| S&P SmallCap 600 Index | SBB | Short Small Cap 600 Proshares | 1x | n/a | 65,108 | |
| S&P SmallCap 600 Index | SDD | ProShares UltraShort SmallCap 600 | 2x | SAA | 23,133 | |
| Real Estate | Dow Jones U.S. Real Estate Index | SRS | ProShares UltraShort Real Estate | 2x | URE | 972,021 |
| Dow Jones U.S. Real Estate Index | REK | ProShares Short Real Estate | 1x | n/a | 38,664 | |
| MSCI US REIT Index | DRV | Direxion Daily Real Estate Bear 3x Shares | 3x | DRN | 251,152 |
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
