Bearish ETF Strategies for a Bearish Outlook
After a tough first half for equity markets, traders continued to increase bets against equities. Exchange-traded fund investors can also hedge against other market risks with bearish or inverse strategies.
According to JPMorgan Chase & Co.’s analysis of major stock index futures, asset managers and hedge funds have raised their bets against U.S. stocks to the highest level since 2016 amid fears of a global slowdown , the the wall street journal reported.
Additionally, according to a survey by the National Association of Active Investment Managers, the average active investor has reduced equity exposure this year and reduced equity allocations to the lowest levels since the onset of the COVID-19 pandemic. 19.
“Everyone is focused on the risk of recession,” Parag Thatte, strategist at Deutsche Bank, told the WSJ.
Along with bets of a recession, the bond market’s recession indicator, an inverted yield curve, recently hit its widest level in two decades. — the majority of past recessions have been preceded by an inverted yield curve or when yields on later-maturity bonds have fallen below yields on short-term debt.
Meanwhile, many market watchers bet that the Federal Reserve would raise interest rates by one percentage point at the next meeting, something that hadn’t happened in decades, further bolstering the belief that policymakers would drag the economy into a slowdown. .
According to Deutsche Bank estimates, investors have now steadily reduced their equity exposure to some of the lowest levels in 12 years. Additionally, bullish bets in the options market among traders have slipped to the lowest level since April 2020.
“We have now determined that it is better to be slightly short rather than long,” Martin Bergin, president of Dunn Capital Management, told the WSJ. “If there is a bounce, we will start taking longer exposure.”
ETF traders looking to protect their portfolios against potential downsides ahead may consider some exposure to bearish or inverted ETFs to protect against further declines.
For example, the ProShares Short S&P500 (SH) takes a simple inverse or -100% daily performance of the S&P 500 Index. Alternatively, for the more aggressive trader, leveraged options include the ProShares UltraShort S&P500 ETF (SDS)which attempts to mirror -2x or -200% of the daily performance of the S&P 500, the Direxion Daily S&P 500 Bear 3x Stock (SPXS)which takes -3x or -300% of the daily performance of the S&P 500, and the ProShares UltraPro Short S&P 500 ETF (SPXU)which also takes -300% from the daily performance of the S&P 500.
Those who want to hedge against the risk of the Dow Jones Industrial Average can use inverse ETFs to add to their long stock positions. The ProShares Short Dow 30 ETF (DOG) tries to reflect -100% of the daily performance of the Dow Jones Industrial Average. For more aggressive traders, the ProShares UltraShort Dow 30 ETF (DXD) takes the -200% of the Dow Jones, and the ProShares UltraPro Short Dow 30 (SDOW) reflects the -300% of the Dow Jones.
Finally, investors can also hedge against a decline in the Nasdaq with bearish options. For example, the ProShares Short QQQ ETF (PSQ) takes the inverse or -100% of the daily performance of the Nasdaq-100 index. For the aggressive trader, the ProShares UltraShort QQQ ETF (QID) follows the double inverse or -200% performance of the Nasdaq-100, and the ProShares UltraPro Short QQQ ETF (SQQQ) reflects the triple inverse or -300% of the Nasdaq-100.
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