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<<Back to part I

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.)

SymbolNameTracksLeverageInverse toAverage Volume
MLPSE-TRACS 1xMonthly Short Alerian MLP Infrastructure Total Return ETNAlerian MLP Infrastructure Total Return Index1xMLPI4,200
BRISDirexion Daily BRIC Bear 2X SharesBank of New York Mellon BRIC Select ADR Index2xBRIL2,211
YANGDirexion Daily China Bear 3X ETFBank of New York Mellon China Select ADR Index3xn/a62,730
COWSDaily Agribusiness Bear 3x SharesDAXglobal Agribusiness Index3xn/a8,686
RUSSDaily Russia Bear 3x SharesDAXglobal Russia Index3xn/a27,472
SDOWProShares UltraPro Short Dow 30 FundDow Jones Industrial Average3xUDOW1,039,270
DXDProShares UltraShort Dow 30Dow Jones Industrial Average Index2xDDM4,814,084
DOGShort Dow 30 ProsharesDow Jones Industrial Average Index1xn/a931,634
SMNProShares UltraShort Basic MaterialsDow Jones U.S. Basic Materials Index2xUYM1,598,292
SBMProShares Short Basic MaterialsDow Jones U.S. Basic Materials Index1xn/a29,143
SZKProShares UltraShort Consumer GoodsDow Jones U.S. Consumer Goods Index2xUGE4,994
SCCProShares UltraShort Consumer ServicesDow Jones U.S. Consumer Services Index2xUCC29,750
SKFProShares UltraShort FinancialsDow Jones U.S. Financials Index2xUYG2,542,455
SEFProShares Short FinancialsDow Jones U.S. Financials Index1xn/a347,445
RXDProShares UltraShort Health CareDow Jones U.S. Health Care Index2xRXL3,531
SIJProShares UltraShort IndustrialsDow Jones U.S. Industrials Index2xUXI14,583
DUGProShares UltraShort Oil & GasDow Jones U.S. Oil & Gas Index2xDIG2,070,267
DDGShort Oil and Gas ProsharesDow Jones U.S. Oil & Gas Index1xn/a15,856
TLLProShares UltraShort TelecommunicationsDow Jones U.S. Select Telecommunications Index2xLTL3,300
SSGProShares UltraShort SemiconductorsDow Jones U.S. Semiconductors Index2xUSD51,133
REWProShares UltraShort TechnologyDow Jones U.S. Technology Index2xROM22,411
SDPProShares UltraShort UtilitesDow Jones U.S. Utilities Index2xUPW7,273
FXPProShares UltraShort FTSE China 25FTSE/Xinhua China 25 Index2xXPP631,697
YXIProShares Short FTSE China 25FTSE/Xinhua China 25 Index1xn/a20,278
SICKDaily Healthcare Bear 3X SharesHealth Care Select Sector Index3xn/a623
INDZDirexion Daily India Bear 2X SharesIndus India Index2xINDL4,647
GASXDirexion Daily Natural Gas Related Bear 2x ETFISE-REVERE Natural Gas Index2xn/a9,389
KRSProShares Short KBW Regional BankingKBW Regional Banking Index1xn/a32,691
MATSDaily Basic Materials Bear 3X SharesMaterials Select Sector Index3xn/a12,043
BZQProShares UltraShort MSCI BrazilMSCI Brazil Index2xUBR167,516
EFZShort MSCI EAFE ProsharesMSCI EAFE Index1xn/a379,609
EFUProShares UltraShort MSCI EAFEMSCI EAFE Index2xEFO172,983
DPKDeveloped Markets Bear 3x SharesMSCI EAFE Index3xDZK106,459
MFSAiPath Short Enhanced MSCI EAFE Index ETNMSCI EAFE Index2xMFLA759
EUMShort MSCI Emerging Markets ProsharesMSCI Emerging Markets Index1xn/a388,883
EDZEmerging Markets Bear 3x SharesMSCI Emerging Markets Index3xEDC3,221,703
EEVProShares UltraShort MSCI Emerging MarketsMSCI Emerging Markets Index2xEET651,305
EMSAiPath Short Enhanced MSCI Emerging Markets Index ETNMSCI Emerging Markets Index2xEMLB3,708
EPVProShares UltraShort MSCI EuropeMSCI Europe Index2xUPV374,830
EWVProShares UltraShort MSCI JapanMSCI Japan Index2xEZJ14,452
SMKProShares UltraShort MSCI Mexico Investable MarketMSCI Mexico Investable Market Index2xUMX5,545
JPXProShares UltraShort MSCI Pacific ex-JpnMSCI Pacific ex-Japan Index2xUXJ1,184
TOTSDaily Total Market Bear 1X SharesMSCI US Broad Market Index1xn/a1,597
BISProShares UltraShort Nasdaq BiotechnologyNASDAQ Biotechnology Index2xBIB2,066
QIDProShares UltraShort QQQNASDAQ-100 Index2xQLD8,613,034
PSQShort QQQ ProsharesNASDAQ-100 Index1xn/a1,347,669
SQQQProShares UltraPro Short QQQ FundNASDAQ-100 Index3xTQQQ3,139,936
HDGEAdvisorShares Active Bear ETFNone1xn/a237,813
DUSTDirexion Daily Gold Miners Bear 2x SharesNYSE Arca Gold Miners Index2xNUGT243,422
SOXSDirexion Daily Semiconductor Bear 3X SharesPHLX Semiconductor Index3xSOXL171,298
ERYDaily Energy Bear 3x SharesRussell 1000 Energy Index3xERX5,191,239
FAZDirexion Financial Bear 3X SharesRussell 1000 Financial Services Index3xFAS22,600,787
SFKProShares UltraShort Russell 1000 GrowthRussell 1000 Growth Index2xUKF18,440
BGZDirexion Large Cap Bear 3X SharesRussell 1000 Index3xBGU4,050,303
ROSAiPath Short Extended Russell 1000 TR Index ETNRussell 1000 Index3xROLA2,309
RETSDirexion Daily Retail Bear 2x SharesRussell 1000 Retail Index2xRETL5,108
TYPDirexion Daily Technology Bear 3X SharesRussell 1000 Technology Index3xTYH936,638
SJFProShares UltraShort Russell 1000 ValueRussell 1000 Value Index2xUVG3,044
SKKProShares UltraShort Russell 2000 GrowthRussell 2000 Growth Index2xUKK19,630
TZADirexion Small Cap Bear 3X Shares 2013 Russell 2000Russell 2000 Index3xTNA30,642,979
RWMShort Russell 2000 ProsharesRussell 2000 Index1xn/a2,576,661
TWMProShares UltraShort Russell 2000Russell 2000 Index2xUWM5,786,022
SRTYProShares UltraPro Short Russell2000 FundRussell 2000 Index3xURTY1,473,805
RTSAiPath Short Extended Russell 2000 TR Index ETNRussell 2000 Index3xRTLA18,991
SJHProShares UltraShort Russell 2000 ValueRussell 2000 Value Index2xUVT6,025
TWQProShares UltraShort Russell 3000Russell 3000 Index2xUWC5,895
SDKProShares UltraShort Russell MidCap GrowthRussell MidCap Growth Index2xUKW2,927
MWNDirexion Daily Mid Cap Bear 3x SharesRussell Midcap Index3xMWJ50,984
SJLUltraShort Russell Mid Cap Value ProsharesRussell MidCap Value Index2xUVU2,785
FSAFactorShares 2X: TBond Bull/S&P 500 BearS&P 500 Bull/TBond Bear Index2xn/a2,039
SHShort S&P 500 ProsharesS&P 500 Index1xn/a8,447,722
SDSProShares UltraShort S&P 500S&P 500 Index2xSSO44,456,961
SPXUProShares UltraPro Short S&P 500S&P 500 Index3xUPRO17,296,178
RSWRydex Inverse 2x S&P 500 ETFS&P 500 Index2xRSU121,478
SFSAiPath Short Extended S&P 500 TR Index ETNS&P 500 Index3xSFLA28,417
BXDBBarclays Short B Leveraged Inverse S&P 500 Total Return IndexS&P 500 Total Return Index1xn/a2,781
BXDCBarclays Short C Leveraged Inverse S&P 500 Total Return IndexS&P 500 Total Return Index2xBXUC9,113
LHBDirexion Daily Latin America Bear 3x SharesS&P Latin America 40 Index3xLBJ39,345
MZZProShares UltraShort MidCap400S&P MidCap 400 Index2xMVV347,398
MYYShort MidCap 400 ProsharesS&P MidCap 400 Index1xn/a131,892
SMDDProShares UltraPro Short Mid Cap 400 FundS&P MidCap 400 Index3xUMDD251,167
SBBShort Small Cap 600 ProsharesS&P SmallCap 600 Index1xn/a65,108
SDDProShares UltraShort SmallCap 600S&P SmallCap 600 Index2xSAA23,133
SRSProShares UltraShort Real EstateDow Jones U.S. Real Estate Index2xURE972,021
REKProShares Short Real EstateDow Jones U.S. Real Estate Index1xn/a38,664
DRVDirexion Daily Real Estate Bear 3x SharesMSCI US REIT Index3xDRN251,152

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

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

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