ETF Talk: Should Your Summer Plans Include Shorting Tech?

Doug Fabian

Doug Fabian is known for his expert knowledge of ETFs, bear funds and enhanced index funds to profit in any market climate.

I have made a case during past ETF Talk articles that technology stocks tend to decline heading into the summer months, but I also want to educate you about a way to profit from any plunge. One answer is to “short” technology, and an exchange-traded fund (ETF) that lets you do so is the ProShares Short QQQ (PSQ).

This non-diversified fund seeks investment results that correspond to the inverse of the performance of the NASDAQ-100 Index. The Index contains 100 of the largest non-financial companies listed on the NASDAQ Stock Market. In a nutshell, PSQ is a bet against technology; when technology stocks fall, PSQ rises, and vice versa.

Because technology stocks have done well so far this year, PSQ has fallen 10.38% in 2013. However, PSQ historically has had strong May and June gains, so anything resembling technology’s usual summer slump should benefit this fund. Furthermore, keep in mind the market adage, “Sell in May and go away.” As this traditional trend has yet to hit this year, an even bigger-than-normal summertime swoon in technology stocks could be ahead. Expect PSQ to make gains if that slippage in technology stocks occurs.

Since PSQ relies on certain stocks falling in value, it does not invest in any specific sectors or individual companies, as most ETFs do. Instead, the fund puts its money into various “Swaps” on the companies in the NASDAQ-100 Index. This strategy means that PSQ gains when these companies decline. This approach is designed to produce the inverse result of the Index’s performance.

PSQ currently is invested entirely in nine holdings, and the top five of these are: Nasdaq 100 Index Swap Goldman Sachs International, 21.42%; Nasdaq 100 Index Swap Credit Suisse International, 17.83%; Nasdaq 100 Index Swap UBS Ag, 16.34%%; Nasdaq 100 Index Swap Morgan Stanley & Co. International Plc, 12.90%; and Nasdaq 100 Index Swap Deutsche Bank Ag, 11.18%.

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While PSQ’s shorting strategy is risky, it could prove fortuitous to hop on for short stretches when technology typically falls for a bit at various times of the year. Indeed, summer is such a time. Combine that historical trend with another yearly trend in “Sell in May and go away,” and you may have the makings of a good month or two for PSQ.

Meanwhile, if you want my advice about buying and selling specific ETFs, including appropriate stop losses, please consider subscribing to my Successful Investing newsletter. As always, I am happy to answer any of your questions about ETFs, so do not hesitate to email me by clicking here. You just may see your question answered in a future ETF Talk.

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