Buying the decline - shorting or inverse ETF?
As the market faces more concerns and a recession is expected. it is possible that some of the sectors to see a decline. For those who do not like the risks coming from shorting a stock, we can consider using inverse ETFs.
REK - an inverse ETF targeting the real estate sector
Here is a list of the top-performing inverse ETFs for each sector, as of March 11th, 2023 by ChatGPT.
Consumer Discretionary: ProShares Short Consumer Discretionary (SCC)
Consumer Staples: ProShares Short Consumer Staples (SPLZ)
Energy: ProShares Short Oil & Gas (DDG)
Financials: ProShares Short Financials (SEF)
Health Care: ProShares Short Health Care (SHC)
Industrials: ProShares Short Industrials (SIJ)
Information Technology: ProShares Short QQQ (PSQ)
Materials: ProShares Short Basic Materials (SBM)
Real Estate: ProShares Short Real Estate (REK)
Telecommunications: ProShares Short Telecommunications (TLL)
It's important to note that inverse ETFs are designed to provide the opposite of the daily performance of their underlying index or benchmark. They are generally used by investors as a way to hedge against market downturns or to make short-term bets against specific sectors or indices. However, inverse ETFs can also carry higher risks and expenses compared to traditional ETFs, and they may not be suitable for all investors. It's important to do your own research and consult with a financial advisor before investing in any ETFs.
This is a list that we can use to start our research. Let us do our due diligence before we invest.
Personally, I am invested in other ETFs like UVXY (for the CBOE fear index VIX) and SQQQ (for shorting the NASDAQ index). These are also leveraged ETFs, meaning that the related expenses and risk exposure are bigger too. These are not sector specific but applies to a wider market.
1D chart of UVXY as of 19 Mar 2023
As per the chart above, UVXY is on an incline, reaching 6.42 on 17 Mar 2023. During the recent peak in March 2020, there were 2 days, UVXY went above $1300. Does this mean that we have the potential to make 200x with this?
This ETF allows a maximum gain of 10x. If my average price is about $6 per share, then, the position would close at $60. An inverse ETF is also more expensive than a traditional ETF. Given the risks & costs of shorting, shorting using such inverse ETF can be a cheaper and less risky way to take advantage of the situation.
At the same time, I recommend that we should buy ETF instead of ETN.
Fidelity explains the difference below:An ETN is an unsecured debt security issued by a bank, unlike an ETF which holds assets such as stocks, commodities, or currencies which are the basis of the price of the ETF. The return of an ETN is linked to a market index or other benchmark.
ETN is “unsecured” debt security, unlike ETF which owns the assets.
There is a chance for profits to be made but as always, let us do our due diligence and manage our risks accordingly. Buying inverse ETF is a short/mid term strategy as no market stays down forever. I am using this as a seasonal trade to build up my capital. This is meant for buying my shortlisted companies after a recession.
Disclaimer: Investing carries risk. This is not financial advice. The above content should not be regarded as an offer, recommendation, or solicitation on acquiring or disposing of any financial products, any associated discussions, comments, or posts by author or other users should not be considered as such either. It is solely for general information purpose only, which does not consider your own investment objectives, financial situations or needs. TTM assumes no responsibility or warranty for the accuracy and completeness of the information, investors should do their own research and may seek professional advice before investing.
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