Stocks ticked slightly higher in early trading, looking to recoup some of the losses of the past few sessions. Investors have sold off heavily since last Friday’s hawkish remarks from Fed Chair J. Powell, erasing gains from earlier in the month and sending the market into negative territory. The Dow and the S&P 500 were on course for their second negative month in three months, while the Nasdaq Composite was on track for its fourth negative month of the past five months.  

Today we’ll discuss a short-term play that allows shareholders to benefit from market backslides. This valuable tactic can be used as a hedge and also to generate quick profit when things take a turn. Unlike short-selling, the risk associated with this tactic is limited, in theory making it a safer option.

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Traders who are looking to benefit from sliding stocks often turn to short-selling. The main risk of traditional short-selling is that while profit is capped (a stock can only fall to zero), the risk is theoretically unlimited. Of course, other tactics can be used to cover a position at any time, but with a short-selling position, inventors risk receiving margin calls on their trading account if their short position moves against them. 

Inverse or “short” ETFs are another option that allows you to profit when a particular investment class declines in value. Some investors use inverse ETFs to profit from market declines, while others use them to hedge their portfolios against falling prices.  

Over short periods, you can expect that the inverse ETF will perform “the opposite” of the index over short periods, but a disconnect may develop over more extended periods. Inverse ETFs will decline as an asset appreciates over time. For that reason, inverse ETFs typically are not seen as good long-term investments. Furthermore, frequent trading often increases fund expenses, and some inverse ETFs have expense ratios of 1% or more.  

When approached correctly, inverse ETFs can be excellent day-trading candidates and highly effective short-term hedging tools. There are several inverse ETFs that can be used to profit from declines in broad market indexes, such as the Russell 2000 or the Nasdaq 100. Also, there are inverse ETFs that focus on specific sectors, such as financials, energy, or consumer staples.

With $4 billion in assets, the ProShares Short S&P 500 (SH) is the largest inverse fund by value. Commonly used by investors as a hedging vehicle, the fund strives to deliver the inverse performance of the S&P 500 (SPX). If you’re concerned about the stock market falling, this fund moves in the opposite direction of the largest 500 U.S. corporations and is the simplest way to protect yourself.   

It’s important to note that SH is designed to deliver inverse results over a single trading session, with exposure resetting every month. Investors considering this ETF should understand how that nuance impacts the risk/return profile and realize the potential for “return erosion” in volatile markets. SH should definitely not be found in a long-term, buy-and-hold portfolio. The fund comes along with an expense ratio of 0.9%.

Read Next: Is this “America’s Nightmare Winter”?

Have you seen this?

Bill Bonner is one of the most successful businessmen in America over the past 50 years…

And he recently retreated to one of his three European properties (on 64 acres, overlooking one of the world’s most beautiful rivers)…

To issue a serious warning for all Americans (click here to see it).

In short, Bonner says we are in for “a very strange period of time in America over the next few years.”

It’s a scenario unlike anything you’ve probably seen before… something he calls: “America’s Nightmare Winter.”

I recommend you pay attention for one simple reason: Bonner has a knack for making really big and accurate macro-economic forecasts…

In fact, he has made three similar predictions in his 50+ year career… and each one proved to be exactly right, although he was mocked each and every time.

I expect this one will be no different. 

Most will pay no attention. Even fewer will take the basic steps he recommends.

But for a small group, I think this information could be life-changing. 

Personally, I’ve now taken three of his four recommended Steps. (You can see all four recommendations here.)

We’ve posted the entire warning and analysis, filmed from one of his European properties on the Blackwater River, on our website.

You can view it for free right here…

Sincerely,

Mike Palmer

Founding Partner, Stansberry Research

P.S. Bonner says this is all happening because two extremely powerful and unstoppable trends, which seem unrelated on the surface, are now headed towards each other, “like freight trains on the same track.” 

That’s why this anti-social 73-year-old is going public to issue what he calls his “Fourth and Final Prediction.” 

Don’t miss this chance to hear from one of the most humble and successful men in America over the past 50 years, explain how America is likely to look very different over the next few years, and how it will affect you and your money. Click here to watch free of charge

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