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

|
Includes: BIS, BRIS, BXDB, BXDC, BZQ, COWS, DDG, DOG, DPK, DRV, DUG, DUST, DXD, EDZ, EEV, EFU, EFZ, EMSA, EPV, ERY, EUM, EWV, FAZ, FSA, FXP, GASX, HDGE, JPX, KRS, LHB, MATS, MFSA, MIDZ, MLPS, MYY, MZZ, NDZ, PSQ, QID, REK, RETS, REW, ROSA, RSW, RTSA, RUSS, RWM, RXD, SBB, SBM, SCC, SDD, SDK, SDOW, SDP, SDS, SEF, SFK, SFSA, SH, SICK, SIJ, SJF, SJH, SJL, SKF, SKK, SMDD, SMK, SMN, SOXS, SPXS, SPXU, SQQQ, SRS, SRTY, SSG, SZK, TECS, TLL, TOTS, TWM, TWQ, TZA, YANG, YXI
by: Epsilon

<<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 (NYSEARCA: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 (NYSEARCA: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
Click to enlarge

ProShares Short S&P 500 (NYSEARCA: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.