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Tickers in this Article: SH, DOG, EFZ, SKF, DDG, PSQ, EFA, MS
Earlier this month the SEC placed a suspension on short selling for a large basket of financials. The rules have also prohibited exchange-traded funds focused on returning the inverse of financials like the UltraShort Financials ProShares ETF (AMEX:SKF) from creating new shares. Without new shares the forces of supply and demand could throw off the true price of the ETFs.

Investors curious about how the SEC's temporary suspension of short selling on 799 financials effects the range of investment options they can use to protect the downside potential of their portfolio should consider the following ETFs. (To dig into the topic of short selling a little more be sure to check out Short Sales For Market Downturns.)

Inverse the Index
Instead of concentrating solely on the financial sector or on the pullback of an individual stock investors may consider ETFs that return the inverse of an index.

For example, if an investor is a large shareholder of Morgan Stanley (NYSE:MS) and he or she is concerned about how a further decline will impact these holdings an investor still has the opportunity to protect the portfolio by using the Short S&P 500 ProShares ETF (AMEX:SH). The SH fund has returned 19.41% year to date while its counter part the SPDRs S&P 500 Index ETF (AMEX:SPY) has returned -17.85%.

Low Financial Sector Exposure
If the S&P 500 index is not your main concern ProShares also offers investors the opportunity to participate in the inverse returns of various slices of the market by using the Short Dow 30 ETF (AMEX:DOG), the Short MSCI EAFE ETF (AMEX:EFZ), the Short Oil & Gas ETF (AMEX:DDG) and the Short QQQ ETF (AMEX:PSQ).

Top Inverse Returns
Among the group of ETFs mentioned, the EFZ fund had the best performance returning 27.89% to investors since the beginning of the year while its counter part the iShares MSCI EAFE ETF (AMEX:EFA) returned -23.37%.

Final Thoughts
When familiar financial names like Bear Stearns, Lehman Brothers (NYSE:LEH) and Fannie Mae (NYSE:FNM) stock prices plunged toward $0.00 per share earlier this year, short sellers made huge profits. Investors should keep in mind that short selling isn't the only way to protect their individual holdings in a volatile market since baskets of ETFs focused on the inverse of broader index returns do exist.

To learn more, check out Inverse ETFs Can Lift A Falling Portfolio.

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