How to use Etfs to Bet against the Stock Market

Nobody knows what the stock market will do. Many people try to guess though, and some even put money on their opinion. One way to bet that the stock market will decline is to buy an ETF that, in effect, shorts the stock market.

ETFs-exchange traded funds-are mutual funds, pools of capital invested in assets by a manager. Unlike ordinary mutual funds, an ETF can be traded all day long, through a stockbroker. They come in over 700 varieties, although most are trying to imitate the return of an index. To try to make money if the market goes down, choose an inverse or an ultra inverse ETF.

Inverse EFTs that short (bet against) an entire index include: PSQ (bets against the  NASDAQ 100), DOG (shorts the Dow Jones Industrials), and SH (shorts the S&P 500). There are many more that short various indexes, and that are designed to go up as much as the related index goes down.

Then there are the ultra inverse ETFs. These racy little numbers are designed to produce double or more the return of the inverse of their related index. QID aims at twice the opposite movement of the NASDAQ 100, SDS aims at twice the inverse of S&P 500, and DXD tries to double the inverse of the industrials. Of course, these also move twice as far down, if the related index goes up.

Many other inverse ETFs are available. Some bet against various investing styles, like growth stocks or value stocks. Some move contrary to certain sectors, like oil stocks, or metals, or real estate.

These are dangerous games. You can lose big money fast! Never, under any circumstances, should you put money in an ultra inverse ETF and ignore it. An inverse ETF does not work as a true hedge. Why? Because of the math. If your investment goes down 50%, you will have to earn 100% to get back to where you started. Inverse ETFs are for alert investors who are watching their investment nearly constantly, and who have established a definite point at which they will cut their losses.

Anyone who wants to play should plan, far in advance, what they will do if the market moves against them. How much of a loss can you stand? At what point exactly will you move to cash, or go long? Can you keep an eagle eye on your chosen fund? In the long run, the market tends to rise.

On the other hand, if your mortgage is paid and you have gas and groceries, plus ample savings, why not play just a little? You may make some money, and you’ll certainly find excitement.