3 ETFs for panicked investors
If you fear the worst is coming and want to protect your portfolio, there are a few funds that can help.
The average investor gets news from the television and Internet along with most Americans. Unfortunately, a large portion of the same investors will rely on that news when making investment decisions.
The problem here is that the news you are watching or reading about is just that, "old news." This news has already been priced into the stock market and trading on old news will only hinder any strategy to make money.
In recent years and, in particular, the last two weeks, the news has been overwhelmingly negative regarding the government and the economy. But what investors need to realize is that there is a major disconnect between the news and the stock market. Anyone that has invested based on headlines the last few years would have missed out on a great bull market.
With all that being said, investors must also sleep at night. And there are bubbles that burst all the time on Wall Street. So if you fear the worst is coming and want to protect your investment portfolio, there are a few ETFs that can help.
ProShares Short S&P 500 ETF (SH)
The ETF seeks a return that is the exact inverse of the S&P 500 for a single day. For example, if the S&P 500 is down 1.5 percent on the day, theoretically SH should be up 1.5 percent and vice versa. Because the ETF is reset each day, over time compounding will significantly alter the results of SH versus the S&P 500, so be careful.
This ETF is a short-term instrument that can be used to protect a portfolio against a drop in the overall U.S. stock market.
AdvisorShares Ranger Equity Bear ETF (HDGE)
The objective of this ETF is to create capital appreciation by shorting domestically traded stocks. The team searches for stocks with low earnings qualities and aggressive accounting.
By being short the market (i.e., betting it will fall), the ETF in theory should do well during any market selloff. From Sept. 18 to Oct. 8, the SPDR S&P 500 ETF (SPY) fell by 4.4 percent. During the same time, HDGE increased in value by 3.4 percent.
Similar to SH, this ETF is typically a short-term play during a bull market, unless the goal is to have some insurance in your portfolio; in that case HDGE could be a longer-term play.
ProShares Short Financials ETF (SEF)
Similar to SH, this ETF will return the one-day inverse of the underlying index, which happens to be the Dow Jones U.S. Financials Index. During most market pullbacks the financials will fall with the overall market. Recently the financials have often led the selling and therefore SEF could provide protection to a portfolio that has not only market exposure, but also above-average exposure to the financial sector.
One important factor to always realize with short ETFs is that the long-term trend in the U.S. stock market has been up. Attempting to time the market for a selloff is not easy and using short ETFs could end up hurting a portfolio's performance more than helping.
Proceed with caution.
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