Shorting the Russell 2000 to Profit from the Drop

Jim Woods

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

With the markets suffering from seemingly daily meltdowns due to COVID-19, now is a great time to consider whether your portfolio might benefit from inverse exchange-traded funds (ETFs). 

One fund that seems set up to outperform given current trends is ProShares Short Russell 2000 ETF (RWM). As you may know, the Russell 2000 is an index of small-cap stocks, and these naturally more volatile companies have tended to be hit extra hard by this crisis, which smaller companies may have more trouble weathering.

In the last month, while the S&P 500 is down about 25%, the Russell 2000 is doing even worse by dropping nearly 40%. The question now is when its slide will end and its recovery begin.

RWM seeks daily investment results that correspond to the inverse (-1x) of the daily performance of the Russell 2000. Recently, its performance has been better than this goal would suggest, as it is up more than 50%. These instruments are rarely perfect, but that has been a good thing lately with RWM. 

The fund is not designed for long-term holding, and to that end, its expense ratio of 0.95% is on the high side. Net assets are $297 million. The fund pays a small yield of 1.38%. Unsurprisingly, RWM has spiked upward in the last few weeks.

This fund does not hold any stocks. Rather, it invests strategically in financial instruments designed to increase in value as the Russell 2000 Index goes down. With the current daily dose of news around the world about the deadly coronavirus spreading near and far, the Russell 2000 faces strong headwinds that could keep it trending downward for a while.

If you are seeking ways to profit in this extreme volatility, ProShares Short Russell 2000 ETF (RWM) may be a valuable fund to investigate.

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.

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