Seeking Alpha
Long/short equity, gold, investment advisor, growth
Profile| Send Message|
( followers)  

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 (OTC: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
Source: How To Bet Against The Market Without Shorting Or Using Options