An Inverse ETF Can Be Effective in Navigating Volatility

Jim Woods

Jim Woods has over 20 years of experience in the markets from working as a stockbroker, financial journalist, and money manager.

The recent fall in the market due to the global spread of the coronavirus has forcibly reminded us of the old adage, “what goes up, must come down.”

In fact, that maxim is truer now than it was when the market seemed to only go up. At a time of such global uncertainty, there are ways for investors to profit, even when the market is sliding as it did last week and one path is through the judicious use of inverse exchange-traded funds (ETFs).

The ProShares UltraShort S&P500 (NYSEARCA: SDS) is an inverse ETF that seeks investment results which correspond to two times the inverse (-2x) of the performance of the S&P 500. The ETF provides exposure to a market-cap-weighted index of 500 large- and mid-cap U.S. firms that the S&P committee selects.

It is worth pointing out that this fund, like most leveraged and inverse ETFs, is designed to provide a positive return at a time when the S&P 500 is dropping. However, SDS, and inverse ETFs in general, do their best work when they are held for only a short time. Holding on to shares of SDS for longer periods is a tricky proposition, as it always is difficult to determine how long a market downturn will last. Thus, it is best to avoid undue risk of confusing a temporary aberration with the start of a bear market.

Furthermore, failing to rebalance SDS shares regularly, especially at a time of heavy market volatility, has the possibility of leaving investors vulnerable to performance drift from the S&P 500 index. This means that it is possible for the value of your shares to fall even as the market moves in a desirable direction.

Exclusive  The Power And Glory Of The V-Shaped Rally 

Chart courtesy of StockCharts.com

The fund currently has more than $1.2 billion in assets under management and an average spread of 0.04%. It also has an expense ratio of 0.89%, meaning that it is more expensive to hold than some other ETFs.

According to Morningstar.com, this fund’s performance has been positive in both the short and long run. As of 3/3/2020, SDS has jumped 14.12% in the past month, 3.14% for the past three months and 12.51% year to date. This is not surprising, since the S&P 500 yielded negative returns during parts of each of those time periods.

In short, while SDS does provide an investor with the ability to profit at a time when the S&P 500 is yielding negative returns, inverse ETFs may not be appropriate for all portfolios. Thus, interested investors always should do their due diligence and decide whether the fund is suitable for their investing goals.

As always, I am happy to answer any of your questions about ETFs, so do not hesitate to send me an email. You just may see your question answered in a future ETF Talk.

Like This Article?
Now Get Jim's FREE Special Report:
The Top 11 Dividend ETFs to
Buy Right Now

Get up to 5X the yields of traditional income plays.

Get Access to the Report, 100% FREE


img
previous article

Investment expert Jim Woods discusses one of the "hidden positives" that resulted from the Fed's recent emergency rate cut.

PREMIUM SERVICES FOR INVESTORS

Dr. Mark Skousen

Named one of the "Top 20 Living Economists," Dr. Skousen is a professional economist, investment expert, university professor, and author of more than 25 books.

Product Details

LEARN MORE HERE

Bryan Perry

A former Wall Street financial advisor with three decades' experience, Bryan Perry focuses his efforts on high-yield income investing and quick-hitting options plays.

Product Details

LEARN MORE HERE

Jim Woods

Jim Woods has over 20 years of experience in the markets from working as a stockbroker,
financial journalist, and money manager. As well as a book author and regular contributor to
numerous investment websites, Jim is the editor of:

Product Details

LEARN MORE HERE

Bob Carlson

Bob Carlson provides independent, objective research covering all the financial issues of retirement and retirement planning. In addition, Bob serves as Chairman of the Board of Trustees of the Fairfax County (VA) Employees’ Retirement System, which has over $2.8 billion in assets.

Product Details

LEARN MORE HERE

Hilary Kramer

Hilary Kramer is an investment analyst and portfolio manager with 30 years of experience on Wall Street. Since 2010, Hilary's financial publications have provided stock analysis and investment advice to her subscribers:

Product Details

LEARN MORE HERE

Jon Johnson

Jon Johnson's philosophy in investing and trading is to take what the market gives you regardless if that is to the upside or downside. For the past 21 years, Jon has helped thousands of clients gain success in the financial markets through his newsletters and education services:

Product Details

LEARN MORE HERE

DividendInvestor.com

Used by financial advisors and individual investors all over the world, DividendInvestor.com is the premier provider and one-stop shop for dividend information and research.

Product Details

Popular tools include our proprietary Dividend Calendar, Dividend Calculator, Dividend Score Card, and many more.

LEARN MORE HERE