Shorting ETFs: ETFs That Thrive In Market Crashes
Shorting ETFs are worth considering if you're looking for an ETF that will potentially thrive during a market crash. These ETFs allow investors to bet against the market. And they can be a valuable tool for hedging your portfolio against losses in a volatile market.
While many different Shorting ETFs are available, the best ones for you will depend on your specific investing goals. Shorting ETFs use complex derivative strategies to allow investors to take bets against the stock market. They are risky and should be used with caution.
A Moment of Caution: The Downside To Shorting ETFs
One of the most significant downsides to shorting ETFs is the fact that you are betting against the stock market. This means that if the market goes up, you will lose money.
Another downside to shorting ETFs is that you will usually have to pay higher fees. Shorting ETFs use complex derivative strategies in the backend to make shorting possible. It’s not uncommon for Shorting ETFs to have expense ratios of 1% or more.
And lastly, Shorting ETFs are designed for those who want to attempt to time the downside of the stock market. Timing the market is nearly impossible and can cost you a lot of money if you take the wrong bet at the wrong time.
Shorting ETFs: Best Practices
Due to how risky these funds are, it’s best not to use any money you can’t afford to lose. Over the long run, the stock market is more likely to have green days than red days. So shorting the market can be a risky strategy.
Shorting ETFs are not meant to be held for long periods. Mainly due to the high fees associated with Shorting ETFs. They are generally used to execute speculative trades.
Also… short ETFs aren’t always executed perfectly. Due to the nature of these funds, sometimes the inverse returns may not match perfectly.
7 Popular Shorting ETFs
$SH (S&P 500 Short ETF)
ETF Goal: Seeks to return -1% from the underlying index (S&P 500)
The S&P 500 Short ETF, ticker $SH, is an exchange-traded fund that provides investors with inverse returns to the S&P 500 index.
The fund tracks the inverse performance of the S&P 500 Index, a broad-based index of the 500 biggest U.S. stocks. So if the S&P 500 goes down -1%, $SH will return +1%.
$DOG (Dow Jones Short ETF)
ETF Goal: Seeks to return -1% from the underlying index (Dow Jones)
The $DOG ETF is a short ETF that tracks the inverse performance of the Dow Jones Industrial Average index. The Dow Jones index includes the 30 largest companies from different sectors in the United States.
So by investing in $DOG, you are shorting all 30 companies. If the Dow Jones goes down -1%, $DOG will return +1%.
$PSQ (NASDAQ 100 Short ETF)
ETF Goal: Seeks to return -1% from the underlying index (Nasdaq 100)
$PSQ is a short ETF that tracks the inverse performance of the Nasdaq 100 index. The Nasdaq 100 index tracks the 100 largest non-financial companies listed on the Nasdaq stock exchange. The index is heavily weighted towards technology companies but includes companies from other sectors in the United States.
$PSQ is a good fund to add if you want to short the tech industry since the Nasdaq 100 is tech-heavy. If the Nasdaq 100 goes down -1%, $PSQ will return +1%.
$QID (x2 Nasdaq 100 Short ETF) (Leveraged)
ETF Goal: Seeks to return -2% from the underlying index (Nasdaq 100)
$QID is a dangerous ETF that uses leverage to amplify your investment. If the NASDAQ 100 goes down 1%, you will see an increase of +2%. This short-term trading instrument should not be held for more than a few days because it can quickly turn negative if there are any market fluctuations.
$SQQQ (x3 Nasdaq 100 Short ETF) (Leveraged)
ETF Goal: Seeks to return -3% from the underlying index (Nasdaq 100)
$SQQQ is a leveraged version of $PSQ. So if the NASDAQ 100 goes down -1%, $SQQQ will return +3%. This ETF can be dangerous since it uses leverage. And like $QID, $SQQQ is not meant to be held for more than a few days. This ETF is commonly used for speculative short-term leveraged trades.
$TBF (20+ year Treasury Bond Short ETF)
ETF Goal: Seeks to return -1% from daily moves in T-bonds with more than 20 years left to maturity
TBF is an excellent choice for investors looking to hedge their bets against rising interest rates. The fund offers (-1x) exposure through futures and swaps, allowing investors to profit from rising long-term interest rates. The daily reset ensures this leverage factor won’t hold constant throughout investment horizons longer than one day. So this is not a buy-and-hold investment.
$REK (Real Estate Short ETF)
ETF Goal: Seeks to return -1% from the underlying Dow Jones U.S Real Estate Index
REK provides an (-1x) inverse bet on the Dow Jones U.S Real Estate Index. So by investing in this fund, you are essentially betting on the U.S Real Estate market to collapse, both commercial and residential. Here are some of the top real estate stocks and REITs held in the Dow Jones U.S Real Estate Index:
Other Ways To Hedge Your Portfolio
Another type of ETF that can potentially be helpful in a market crash is a Gold ETF. Gold is generally seen as a way to diversify your portfolio away from the modern financial system. Many investors see gold as a hedge against inflation and economic uncertainty. A weaker U.S dollar tends to result in higher gold prices. However, the reverse is also true. A stronger U.S dollar tends to result in lower gold prices.
Gold shares ETFs offer investors exposure to the gold market without having to take physical possession of the metal.
Popular Gold ETFs:
$GLD (SPDR Gold Shares ETF)
It is the largest and most popular gold ETF. The fund has over $52 billion in assets under management. GLD is one of the most liquid gold ETFs, with an average daily trading volume of over 5 million shares. GLD also has an expense ratio of 0.40%.
$IAU (iShares Gold Trust ETF)
IAU tracks gold spot price using gold bars held in worldwide vaults. The fund has over $26 billion in assets under management. IAU also offers a low expense ratio of 0.25%.
Final Thoughts: Shorting ETFs
No matter what type of ETF you choose, do your research and understand how things work before investing.
Shorting ETFs can be a valuable tool when actively protecting your portfolio from a potential market crash. But only if you know what you are doing and not investing any money you can’t afford to lose. Some investors think of Shorting ETFs as insurance against stock market black swans.
No matter your reason for using Shorting ETFs, make sure you carefully select the right ETF for you. That way, your portfolio survives – and maybe even thrives – in a volatile market.
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As Always: Buy things that pay you to own them.
-Josh
Blog Post: #051
