How To Profit From A Stock Market Crash, Part II: Inverse Equity ETFs

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Let's say that the markets did, in fact, turn extremely bearish and you, being the wise investor you are, properly protected your capital and were stopped out of your positions. Now what?

My advice, assuming you don't short stocks or trade options, would be to shift your strategy toward equities that move in an inverse fashion, equities that rise as markets or other related indexes fall. Yes, these types of equities exist and yes, they are one of the easiest tools to use to profit from a down-trending market, sector, index, etc.

Inverse ETFs; Bear ETFs, or short ETFs are equities that move inversely to, or mirror a specific sector, index, other related ETF, or the like. For example, if the Dow Jones industrial average falls, Short Dow 30 Proshares (DOG), an inverse ETF that tracks the Dow, will move upward.

Some of these inverse ETFs also offer leverage to the investor as well, generally by multiples of two or three. As an example, if the S&P 500 falls 1%, ProShares UltraShort S&P 500 (SDS), an inverse ETF that mirrors the S&P 500 with twice the leverage, will rise 2%. (Please note that ETF movements are not entirely precise and may differ slightly from the actual index, fund, etc.)

Below is a list of inverse equity ETFs that will move upward when their tracked sector, market, or index falls. (A complete list of inverse ETFs can be found here.)

Symbol	Name	Tracks	Leverage	Inverse to	Average Volume
MLPS	E-TRACS 1xMonthly Short Alerian MLP Infrastructure Total Return ETN	Alerian MLP Infrastructure Total Return Index	1x	MLPI	4,200
BRIS	Direxion Daily BRIC Bear 2X Shares	Bank of New York Mellon BRIC Select ADR Index	2x	BRIL	2,211
YANG	Direxion Daily China Bear 3X ETF	Bank of New York Mellon China Select ADR Index	3x	n/a	62,730
COWS	Daily Agribusiness Bear 3x Shares	DAXglobal Agribusiness Index	3x	n/a	8,686
RUSS	Daily Russia Bear 3x Shares	DAXglobal Russia Index	3x	n/a	27,472
SDOW	ProShares UltraPro Short Dow 30 Fund	Dow Jones Industrial Average	3x	UDOW	1,039,270
DXD	ProShares UltraShort Dow 30	Dow Jones Industrial Average Index	2x	DDM	4,814,084
DOG	Short Dow 30 Proshares	Dow Jones Industrial Average Index	1x	n/a	931,634
SMN	ProShares UltraShort Basic Materials	Dow Jones U.S. Basic Materials Index	2x	UYM	1,598,292
SBM	ProShares Short Basic Materials	Dow Jones U.S. Basic Materials Index	1x	n/a	29,143
SZK	ProShares UltraShort Consumer Goods	Dow Jones U.S. Consumer Goods Index	2x	UGE	4,994
SCC	ProShares UltraShort Consumer Services	Dow Jones U.S. Consumer Services Index	2x	UCC	29,750
SKF	ProShares UltraShort Financials	Dow Jones U.S. Financials Index	2x	UYG	2,542,455
SEF	ProShares Short Financials	Dow Jones U.S. Financials Index	1x	n/a	347,445
RXD	ProShares UltraShort Health Care	Dow Jones U.S. Health Care Index	2x	RXL	3,531
SIJ	ProShares UltraShort Industrials	Dow Jones U.S. Industrials Index	2x	UXI	14,583
DUG	ProShares UltraShort Oil & Gas	Dow Jones U.S. Oil & Gas Index	2x	DIG	2,070,267
DDG	Short Oil and Gas Proshares	Dow Jones U.S. Oil & Gas Index	1x	n/a	15,856
TLL	ProShares UltraShort Telecommunications	Dow Jones U.S. Select Telecommunications Index	2x	LTL	3,300
SSG	ProShares UltraShort Semiconductors	Dow Jones U.S. Semiconductors Index	2x	USD	51,133
REW	ProShares UltraShort Technology	Dow Jones U.S. Technology Index	2x	ROM	22,411
SDP	ProShares UltraShort Utilites	Dow Jones U.S. Utilities Index	2x	UPW	7,273
FXP	ProShares UltraShort FTSE China 25	FTSE/Xinhua China 25 Index	2x	XPP	631,697
YXI	ProShares Short FTSE China 25	FTSE/Xinhua China 25 Index	1x	n/a	20,278
SICK	Daily Healthcare Bear 3X Shares	Health Care Select Sector Index	3x	n/a	623
INDZ	Direxion Daily India Bear 2X Shares	Indus India Index	2x	INDL	4,647
GASX	Direxion Daily Natural Gas Related Bear 2x ETF	ISE-REVERE Natural Gas Index	2x	n/a	9,389
KRS	ProShares Short KBW Regional Banking	KBW Regional Banking Index	1x	n/a	32,691
MATS	Daily Basic Materials Bear 3X Shares	Materials Select Sector Index	3x	n/a	12,043
BZQ	ProShares UltraShort MSCI Brazil	MSCI Brazil Index	2x	UBR	167,516
EFZ	Short MSCI EAFE Proshares	MSCI EAFE Index	1x	n/a	379,609
EFU	ProShares UltraShort MSCI EAFE	MSCI EAFE Index	2x	EFO	172,983
DPK	Developed Markets Bear 3x Shares	MSCI EAFE Index	3x	DZK	106,459
MFSA	iPath Short Enhanced MSCI EAFE Index ETN	MSCI EAFE Index	2x	MFLA	759
EUM	Short MSCI Emerging Markets Proshares	MSCI Emerging Markets Index	1x	n/a	388,883
EDZ	Emerging Markets Bear 3x Shares	MSCI Emerging Markets Index	3x	EDC	3,221,703
EEV	ProShares UltraShort MSCI Emerging Markets	MSCI Emerging Markets Index	2x	EET	651,305
EMSA	iPath Short Enhanced MSCI Emerging Markets Index ETN	MSCI Emerging Markets Index	2x	EMLB	3,708
EPV	ProShares UltraShort MSCI Europe	MSCI Europe Index	2x	UPV	374,830
EWV	ProShares UltraShort MSCI Japan	MSCI Japan Index	2x	EZJ	14,452
SMK	ProShares UltraShort MSCI Mexico Investable Market	MSCI Mexico Investable Market Index	2x	UMX	5,545
JPX	ProShares UltraShort MSCI Pacific ex-Jpn	MSCI Pacific ex-Japan Index	2x	UXJ	1,184
TOTS	Daily Total Market Bear 1X Shares	MSCI US Broad Market Index	1x	n/a	1,597
BIS	ProShares UltraShort Nasdaq Biotechnology	NASDAQ Biotechnology Index	2x	BIB	2,066
QID	ProShares UltraShort QQQ	NASDAQ-100 Index	2x	QLD	8,613,034
PSQ	Short QQQ Proshares	NASDAQ-100 Index	1x	n/a	1,347,669
SQQQ	ProShares UltraPro Short QQQ Fund	NASDAQ-100 Index	3x	TQQQ	3,139,936
HDGE	AdvisorShares Active Bear ETF	None	1x	n/a	237,813
DUST	Direxion Daily Gold Miners Bear 2x Shares	NYSE Arca Gold Miners Index	2x	NUGT	243,422
SOXS	Direxion Daily Semiconductor Bear 3X Shares	PHLX Semiconductor Index	3x	SOXL	171,298
ERY	Daily Energy Bear 3x Shares	Russell 1000 Energy Index	3x	ERX	5,191,239
FAZ	Direxion Financial Bear 3X Shares	Russell 1000 Financial Services Index	3x	FAS	22,600,787
SFK	ProShares UltraShort Russell 1000 Growth	Russell 1000 Growth Index	2x	UKF	18,440
BGZ	Direxion Large Cap Bear 3X Shares	Russell 1000 Index	3x	BGU	4,050,303
ROSA	iPath Short Extended Russell 1000 TR Index ETN	Russell 1000 Index	3x	ROLA	2,309
RETS	Direxion Daily Retail Bear 2x Shares	Russell 1000 Retail Index	2x	RETL	5,108
TYP	Direxion Daily Technology Bear 3X Shares	Russell 1000 Technology Index	3x	TYH	936,638
SJF	ProShares UltraShort Russell 1000 Value	Russell 1000 Value Index	2x	UVG	3,044
SKK	ProShares UltraShort Russell 2000 Growth	Russell 2000 Growth Index	2x	UKK	19,630
TZA	Direxion Small Cap Bear 3X Shares 2013 Russell 2000	Russell 2000 Index	3x	TNA	30,642,979
RWM	Short Russell 2000 Proshares	Russell 2000 Index	1x	n/a	2,576,661
TWM	ProShares UltraShort Russell 2000	Russell 2000 Index	2x	UWM	5,786,022
SRTY	ProShares UltraPro Short Russell2000 Fund	Russell 2000 Index	3x	URTY	1,473,805
RTSA	iPath Short Extended Russell 2000 TR Index ETN	Russell 2000 Index	3x	RTLA	18,991
SJH	ProShares UltraShort Russell 2000 Value	Russell 2000 Value Index	2x	UVT	6,025
TWQ	ProShares UltraShort Russell 3000	Russell 3000 Index	2x	UWC	5,895
SDK	ProShares UltraShort Russell MidCap Growth	Russell MidCap Growth Index	2x	UKW	2,927
MWN	Direxion Daily Mid Cap Bear 3x Shares	Russell Midcap Index	3x	MWJ	50,984
SJL	UltraShort Russell Mid Cap Value Proshares	Russell MidCap Value Index	2x	UVU	2,785
FSA	FactorShares 2X: TBond Bull/S&P 500 Bear	S&P 500 Bull/TBond Bear Index	2x	n/a	2,039
SH	Short S&P 500 Proshares	S&P 500 Index	1x	n/a	8,447,722
SDS	ProShares UltraShort S&P 500	S&P 500 Index	2x	SSO	44,456,961
SPXU	ProShares UltraPro Short S&P 500	S&P 500 Index	3x	UPRO	17,296,178
RSW	Rydex Inverse 2x S&P 500 ETF	S&P 500 Index	2x	RSU	121,478
SFSA	iPath Short Extended S&P 500 TR Index ETN	S&P 500 Index	3x	SFLA	28,417
BXDB	Barclays Short B Leveraged Inverse S&P 500 Total Return Index	S&P 500 Total Return Index	1x	n/a	2,781
BXDC	Barclays Short C Leveraged Inverse S&P 500 Total Return Index	S&P 500 Total Return Index	2x	BXUC	9,113
LHB	Direxion Daily Latin America Bear 3x Shares	S&P Latin America 40 Index	3x	LBJ	39,345
MZZ	ProShares UltraShort MidCap400	S&P MidCap 400 Index	2x	MVV	347,398
MYY	Short MidCap 400 Proshares	S&P MidCap 400 Index	1x	n/a	131,892
SMDD	ProShares UltraPro Short Mid Cap 400 Fund	S&P MidCap 400 Index	3x	UMDD	251,167
SBB	Short Small Cap 600 Proshares	S&P SmallCap 600 Index	1x	n/a	65,108
SDD	ProShares UltraShort SmallCap 600	S&P SmallCap 600 Index	2x	SAA	23,133
SRS	ProShares UltraShort Real Estate	Dow Jones U.S. Real Estate Index	2x	URE	972,021
REK	ProShares Short Real Estate	Dow Jones U.S. Real Estate Index	1x	n/a	38,664
DRV	Direxion Daily Real Estate Bear 3x Shares	MSCI US REIT Index	3x	DRN	251,152

ProShares Short S&P 500 (SH) and Short Dow 30 Proshares are two of my favorite inverse ETFs to use when betting against the overall market. As their names imply, ProShares Short S&P 500 and Short Dow 30 Proshares move inversely to the S&P 500 index and the Dow Jones industrial average, respectively. These ETFs can also be very useful when using technical analysis to try and predict market trends.

For example, and illustrated by the graph below, ProShares Short S&P 500 failed to fall through its support level at $40.00 for the latter half of 2011. Conversely, the S&P 500 was unable to break out and begin a significant positive trend during this time. As 2012 began, however, ProShares Short S&P 500 fell below resistance, marking a new downtrend for the ETF. As most of us know, this trend, though negative for ProShares Short S&P 500, marked a significant continuation point for the positive trend of the S&P 500. (The duration of this trend, of course, is still very much in question.)

Click to enlarge:

In summary, though they should generally not be used for long term investing, inverse ETFs give investors a great amount of flexibility by allowing them to profit from a bearish market, sector, index or the like, without shorting or trading options.

Next we will look at commodities based investments that can provide safety for investors in an otherwise unsafe bear market.

Continue to Part III

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: The use of inverse ETFs is generally recommended as a short term investment strategy only.