ETF's For A Bear Market & Recession (FXP, DOG, PSQ, SH, QID, SDS, DXD, RSW, RMS, RRZ)

Are we in a Bear Market?  If we aren’t it sure feels like one.  The Dow Jones Industrial Average, or the DJIA, is down some 7.9% to date in 2008 after a December-end close of 13,264.82;and it is down some 14.5% from the 14,280.00 highs of October 2007.The NASDAQ has fared even worse with a 12.2% drop since December-endclose of 2,652.28; and it is down 18.7% from the highs of 2,861.51 on October 31, 2007.

This new stimulus package is going to help keep things afloat a bit and the new mortgage cap lifting along with lower mortgage rates will allow many homeowners to refinance.  But there are still going to be many more credit blow-ups, more house foreclosures, more cars repossessed, more credit card defaults, more delinquent payments, slower retail sales, more bankruptcies, and probably fewer jobs.   

We can’t predict where the market will be at the end of the year and can’t predict how bad the economy will really get.  We may have a softer landing than it was looking just last week, but it is still going to feel like a thud or a hard landing if not worse to many individuals and many businesses.  We’ll be the first to admit that with many in the media covering “Bear Markets” may already mean that the worst has been seen.  Many argue that long-term investors and value investors want to start buying stocks in a recession because if you wait for the good news to come in you might have already missed the boat. wanted to compile a list of “Inverse ETF”s” that are actually designed to go up in a down market.  This is in a sense the same thing as short selling without having to understand the metrics and rules of short selling.  In essence, these are the easiest transactions to make for novice investors and sophisticated fund managers alike.

ProShares has created ETF’s that trade inversely with the markets.  These are aimed to allow investors and traders to hedge against market downturns or that want to profit from a market decline.  These ETFs are very liquid and actively traded and are designed to go up when indexes go down.  As a reminder, the SHORT funds use no leverage, but the UltraShort funds employ leverage.  Here is that list by Fund (Ticker):

  • Short QQQ (AMEX: PSQ)    
  • Short Dow30 (AMEX: DOG)    
  • Short S&P500 (AMEX: SH)    
  • Short MidCap400 (AMEX: MYY)    
  • Short SmallCap600 (AMEX: SBB)    
  • Short Russell2000 (AMEX: RWM)    
  • UltraShort QQQ (AMEX: QID)    
  • UltraShort Dow30 (AMEX: DXD)   
  • UltraShort S&P500 (AMEX: SDS)    
  • UltraShort MidCap400 (AMEX: MZZ)   
  • UltraShort SmallCap600 (AMEX: SDD)   
  • UltraShort Russell2000 (AMEX: TWM)
  • UltraShort FTSE/Xinhua China 25 (AMEX: FXP)… short selling the Chinese Stocks.

Rydex Funds was perhaps the first of the mutual fund operators that actually had the inverse of the S&P called the Rydex Ursa Fund, now called the Rydex Inverse S&P 500 Strategy Inv (RYURX).  As Rydex saw the importance and rise of ETF’s, it combined its open-ended fund management operations into one that now has ETF’s for traders as well.  Here are its inverse funds:

  • Rydex Inverse 2x S&P 500 (AMEX: RSW)
  • Rydex Inverse 2x S&P MidCap 400 (AMEX: RMS)
  • Rydex Inverse 2x Russell 2000 (AMEX: RRZ)

These are not all of the ETF’s out there.  But these are two of the fund families we have seen that have liquidity and recognition in the sector.  Stay tuned to our ETF news as we are expanding this into a new branch.  We’ll also be covering certain defensive strategy ETF’s that use covered call option strategies, value investing strategies, and some that focus on defensive strategies.

Jon C. Ogg
January 27, 2008

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