How Investors Can Make Money in a Bear Market With These 5 Inverse ETFs
With equities down across the board, learn how everyday investors are still generating profits using these inverse ETFs.
A confluence of factors has resulted in rampant inflation and supply chain shortages. The Federal Reserve has been raising interest rates to combat inflation, dramatically slowing home buying. The recently announced GDP numbers showed that GDP dropped relative to the prior year for the second quarter in a row, pointing toward the economy entering a recession.
Whether equities have fallen enough to account for the recession or if they have further to go is very much up for debate, with nobody knowing the correct answer. Any investors in the bear camp that believe there’s more downside coming should consider the following inverse ETFs, which should return significant gains if the fall continues.
1. ProShares Short S&P 500 ETF (SH)
If one believes the overall market will fall due to the macro environment, you can’t go wrong by shorting the S&P 500 (SPX). The ProShares Short S&P 500 ETF (NYSE Arca: SH) allows investors to do just that. The EFT uses a variety of financial instruments, including stock options, swaps and futures, to approximate the inverse performance of the S&P 500.
The large amount of work that goes into the ETF requires a relatively large fee to own the ETF. This makes day-trading the ETF the most attractive option for investors, but even those that buy and hold should profit handsomely if we enter a long-term recession.
Shares of the ProShares Short S&P 500 ETF (NYSE Arca: SH) are currently trading at $15.89 per share, up 0.32% on the day. YTD, SH ETF is up 17.36%.
2. ProShares UltraShort S&P 500 ETF (SDS)
The ProShares UltraShort S&P 500 ETF (NYSE Arca: SDS) is similar to the ProShares Short S&P 500 ETF, except it offers investors twice the leverage. This means it will move inversely to the S&P 500, but the swings will be twice as dramatic. Only those investors with a heightened risk tolerance should opt for this ETF. However, if the current trend continues, that higher risk would result in a higher return.
Shares of the ProShares UltraShort S&P 500 ETF last traded at $46.41 per share, up 0.78% on the day. YTD, SDS ETF is up 32.98%.
3. ProShares UltraPro Short S&P 500 ETF (SPXU)
The ProShares UltraPro Short S&P 500 ETF (NYSE Arca: SPXU) is also similar to the ProShares Short S&P 500 ETF, but this time the leverage is raised to three times the base ETF. This much leverage can result in huge swings in the share price, especially on days when major announcements or events occur. Only those with a rock-solid belief that the market is heading south and a very high-risk tolerance should consider this. All others, stay away.
Shares of the ProShares UltraPro Short S&P 500 ETF closed trading today at $17.73 per share, up 1.31% on the day. YTD, SPXU ETF is up 45.45%.
4. ProShares Short Russell 2000 ETF (RWM)
While the S&P 500 comprises the 500 largest companies on the market, the Russell 2000 Index (RUT) is a subset of the Russell 3000 Index (RUA), which tracks the 3,000 largest companies. The Russell 2000 is the 2,000 smallest companies that make up the Russell 3000.
These companies are much smaller than those in the S&P 500, which means they are usually more volatile, making the ProShares Short Russell 2000 ETF (NYSE Arca: RWM) more volatile than its corresponding investment S&P 500 ETF. More volatility means higher returns and more significant losses, so risk tolerance again plays a factor.
Shares of ProShares Short Russell 2000 ETF closed today’s trading session at $24.58 per share, up 0.82% on the day. YTD, RWM ETF is up 19.26%.
5. ProShares UltraPro Short QQQ ETF (SQQQ)
The last option on our list is the ProShares UltraPro Short QQQ ETF (NYSE Arca: SQQQ), which seeks to return the inverse of the Nasdaq 100 Index (NDX). Most of the companies in the NASDAQ 100 are tech companies, which have been some of the hardest hit during the correction. This ETF offers three times the leverage so that investors can expect large swings in the share price. If one believes that tech is still overvalued and has a significant risk, this is the inverse ETF to trade.
Shares of the ProShares UltraPro Short QQQ ETF are currently trading at $48.29 per share, up 2.24% on the day. YTD, SQQQ ETF is up 68.26%.
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