If the falling stock market has got you down, don’t despair. You can profit from this trend by buying “bear market” ETFs, investment vehicles that bet against the stock market. The value of these rise as share prices fall, and a number of them have been doing very well this year.
Exchange-traded funds, or ETFs, are funds that can be bought and sold like stocks. They differ from stocks in that they tend to focus on groups of companies, sectors or markets as a whole, rather than on individual firms. They’re also usually more expensive to trade because they charge fees on top of trading commissions when you buy and sell them. But they’ve opened up a whole new world of money-making possibilities to investors, including the ability to short stocks.
Below is a list of some bear market ETFs you might want to consider:
UltraShort Real Estate (ProShares)
Ticker: SRS
Gross expense ratio: 1.24%
Management fee: 0.75%
The “ultra” in the name of this ETF indicates it produces turbo-charged returns: it rises two dollars in value for every dollar in value lost by the Dow Jones U.S. Real Estate Index. Of course, the reverse can happen too: it’ll fall two dollars in value for every dollar rise in the same index. SRS has been rising as the real estate sector continues to suffer from falling home prices.
UltraShort Financials (ProShares)
Ticker: SKF
Gross expense ratio: 1.3%
Management fee: 0.75%
Doubles the inverse performance of the Dow Jones U.S. Financials Index. SKF has climbed in value as share prices of financial institutions – dogged by the subprime mess – have slid.
UltraShort Russell2000 Value (ProShares)
Ticker: SJH
Gross expense ratio: 2.12%
Management fee: 0.75%
Performs the opposite (times two) of the Russell 2000 Index, which tracks 2000 of the smallest listed companies in the United States. Analysts say the reason the Russell 2000 has been falling in value (and SJH rising) is that investors believe small companies will suffer from depressed consumer spending due to rising oil prices and tighter credit markets (caused by the subprime mess).
UltraShort Consumer Services (ProShares)
Ticker: SCC
Gross expense ratio: 1.94%
Management fee: 0.75%
Doubles the inverse performance of the Dow Jones U.S. Consumer Services Index. As with SJH, SCC has been doing well, experts say, because investors see bad times ahead for the average consumer, and those who sell goods to the average consumer.
UltraShort Russell MidCap Value (ProShares)
Ticker: SJL
Gross expense ratio: 2.37%
Management fee: 0.75%
Performs the opposite (times two) of the Russell MidCap Value Index, which tracks medium-sized companies that are considered undervalued. It’s hard to say why such firms are doing poorly this year (and thus boosting SJL), but there is usually a reason why a company’s stock price is low, and therefore considered “undervalued.” In light of current market uncertainties (falling U.S. dollar, talk of a possible recession), perhaps investors simply feel these value stocks are a poor bet.
UltraShort FTSE/Xinhua China 25 (ProShares)
Ticker: FXP
Expense ratio: 0.95%
Management fee: 0.75%
Doubles the inverse performance of the FTSE/Xinhua China 25 Index, which tracks the 25 largest and most liquid Chinese stocks listed and trading on the Hong Kong Stock Exchange. Many investors don’t know this, but these companies are all partly or wholly owned by the Chinese government. Why are they falling (and FXP rising)? One reason may be that stocks in China have risen more than five-fold over the last two years. Analysts say the market is due for a correction.
UltraShort MSCI Emerging Markets (ProShares)
Ticker: EEV
Expense ratio: 0.95%
Management fee: 0.75%
Performs the opposite (times two) of the MSCI Emerging Markets Index, which tracks a number of fast-growing economies, including China, India, Russia, Brazil and 21 others. The stock markets in these countries have been skyrocketing in recent years, so their drop in value this month may indicate the decompression of an investment bubble.
UltraShort Russell1000 Value (ProShares)
Ticker: SJF
Gross expense ratio: 2.37%
Management fee: 0.75%
Doubles the inverse performance of the Russell 1000 Value Index, which tracks 1000 of the smallest and most undervalued listed companies in the United States. As with the UltraShort Russell2000 Value ETF (SJH), SJF is rising in value because investors probably view smaller, undervalued companies as riskier bets in the current uncertain economic climate.
Short MSCI Emerging Markets (ProShares)
Ticker: EUM
Expense ratio: 0.95%
Management fee: 0.75%
Note this is not an “ultrashort” ETF, which means that it only performs the inverse, not the inverse times two, of a target index. In this case it’s the the MSCI Emerging Markets Index, which tracks the performance of a number of fast-growing economies, including China, India, Russia, Brazil and 21 others. Stocks in these countries are probably falling because they’ve been due for a correction for some time.
Short Russell2000 (ProShares)
Ticker: RWM
Expense ratio: 1.7%
Management fee: 0.75%
Again, this is simply a “short,” not an “ultrashort” (no doubled returns here). RWM performs the opposite of the Russell 2000 Index, which tracks the performance of 2000 of the smallest listed companies in the United States. Investors have been deserting small stocks because they fear such companies will be hard hit by rising oil prices, tight credit markets and softening consumer demand.
Other bear market ETFs that have risen in value this year: TWM UltraShort Russell2000 ProShares, SDD UltraShort SmallCap600 ProShares, EFU UltraShort MSCI EAFE ProShares, SBB Short S&P SmallCap600 ProShares, SKK UltraShort Russell2000 Growth ProShares and EFZ Short MSCI EAFE ProShares. This last one is the inverse of an index that tracks global stocks other than those listed in the United States.
NOTE: You invest at your own risk. The author and this website cannot be held responsible for investment losses incurred by readers of this article. (Be careful. You could lose your shirt.)