Volatility has returned in 2014 after consecutive months of
relative calm that has many investors looking for ways to profit
on the downside or hedge existing positions.
Advanced traders may be seeking out options strategies or
shorting individual stocks to great effect, but another
alternative is to consider an inverse ETF that tracks a broad
An example of this concept is the ProShares Short QQQ (NYSE:
), which provides investment results that correspond to the
inverse daily performance of the NASDAQ-100 Index.
Put simply, this ETF moves in the opposite direction of the
popular technology-laden PowerShares QQQ (NASDAQ:
Diversification and liquidity are just two
advantages of investing in an ETF
instead of shorting individual companies. In addition, you
can own inverse ETFs in a retirement account without having to
worry about margin privileges being enabled.
This makes them very flexible tools for traders looking to
profit when stocks are falling.
Consumer Discretionary ETF Woes Continue
In the month of April, PSQ has risen four percent as investors
have shied away from high beta stocks in industries like
biotechnology and social media. The aggressive ProShares
UltraShort NASDAQ Biotechnology (NASDAQ:
) gained 17 percent over that same time frame.
This leveraged ETF is designed to provide double the inverse
daily performance of the NASDAQ Biotechnology Index.
The use of leverage in an exchange-traded vehicle is certainly
not for the faint of heart as it magnifies prices moves in either
Another concern with leverage is how its compounding effect
erodes the tracking efficiency of the underlying index over time.
Leveraged ETFs are only designed to track the daily price
movement of an index.
Thus, investors should not expect that a 10 percent move in an
index for a 2x leveraged ETF over a three-month time frame is
going to correlate perfectly to a 20 percent return.
Most experts agree that inverse and leverage ETFs should only
be used for short-term trading opportunities rather than
long-term investment themes.
Investors that are considering these tools should carefully
consider the risks and research them thoroughly before opting to
employ them moving forward.
© 2014 Benzinga.com. Benzinga does not provide investment
advice. All rights reserved.
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