Remember sell in May and go away? That seemed to work out pretty well, especially if you came back in June. Now we are faced with the historically weak month of September approaching. This fall we are faced with uncertainty of the presidential election and the impending doom of a potential fiscal cliff, which if not acted upon will send us into a recession according to the Congressional Budget Office. Dr. Doom, Marc Faber, recently stated the odds of global recession are now 100%. I believe he actually meant 100% likelihood or probability of global recession, as anyone who has taken my course in epidemiology knows odds range from zero to infinity, making 100% seem somewhat benign. In all seriousness, the pressure on the bulls this fall is mounting.
One way to position your portfolio is by buying insurance with gold or silver in the form of (GLD), (IAU) or (SLV). These ETFs track the price of these precious metals which I see as continuing to rise due to continued central bank stimulus and inflationary pressure. For those who are growing more bearish, investors can also consider selling stock, selling covered calls on their positions, shorting stocks or by investing in a bear fund. While each of these approaches has their respective benefits and risks, in this article I want to highlight my favorite three bear ETFs.
ProShares Short S&P500 (SH): This ETF seeks "daily investment results that correspond to the inverse of the daily performance of the S&P 500 index. The S&P 500 index is a measure of large cap United States stock performance. It is a capitalization weighted index of 500 United States operating companies and selected real estate investment trusts." SH attempts to invest "at least 80% of its net assets, including any borrowings for investment purposes, to investments that, in combination, have economic characteristics that are inverse to those of the Index. It intends to invest assets not invested in financial instruments, in debt instruments and/or money market instruments. The Fund intends to concentrate its investments in a particular industry or group of industries to approximately the same extent as the Index is so concentrated."
SH currently trades at $35.28 on approximately 3.3 million shares exchange hands daily. SH is down 4.8% in the last month, while the S&P 500, as measured by the (SPY) is up 4.8%. SH has a 52 week range of $34.57-$48.48.
ProShares UltraShort S&P500 (SDS): This leveraged fund seeks "daily investment results that correspond to twice the inverse of the daily performance of the S&P 500. Recall the S&P 500 is "a float-adjusted, market capitalization-weighted index of 500 United States operating companies and real estate investment trusts selected through a process that factors criteria, such as liquidity, price, market capitalization and financial viability." SDS invests in common stock issued by public companies. SDS also invests in derivatives, which are financial instruments whose value is derived from the value of an underlying asset, interest rate or index.
SDS currently trades at $14.48 a share with average daily volume of 18.5 million shares exchanging hands. In the last month, SDS is down 9.8% while the SPY is up 4.8%. SDS has a 52 week range of $14.03-$28.16.
Direxion Daily Small Cap Bear 3X Shares (TZA): This is one of my favorite ways to invest in a bear market short term. TZA seeks "daily investment results of 300% of the inverse of the price performance of the Russell 2000 Index (also known as the small cap index). The Russell 2000 measures the performance of the small cap segment of the United States equity universe and consists of the smallest 2,000 companies in the Russell 3000 Index, representing approximately 10% of the total market capitalization of the Russell 3000 Index. It includes approximately 2,000 of the smallest securities based on a combination of their market cap and current index membership." TZA actually does not invest in equity securities or stocks. What TZA does is creates short positions by investing at least 80% of its net assets in financial instruments to provide leveraged and unleveraged exposure to the Small Cap Index and the remainder in money market instruments.
TZA currently trades at $17.00 a share on average daily volume of 20.7 million shares. In the last month TZA is down 15.2% compared to the ETF that tracks the Russell 2000 index (IWM) which is up 5.2%. TZA has a 52 week range of $15.68-$63.87.
Bottom line: It's a lot easier to make the bear case then it is to make the bull case right now. There are lots of ways to prepare for a potential short term bear market including selling covered calls, buying puts, shorting stocks and stock indices, or just plain old selling equities to raise cash. I further recommend buying gold and silver physically or through the GLD, IAU or SLV, in addition to considering a bearish ETF fund. The funds perform very well in short term bear markets. An ideal investing approach is to employ a combination of all of these approaches. For those who want to play a bear ETF the three highlighted ETFs in this article are my favorites.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in TZA over the next 72 hours.