With concerns still brewing in the economy and the stock market, I am constantly trying to figure where is the best place to invest. If there is a recession, which many economists predict will occur, we are set to have a much larger decline in the U.S. equity markets.
The logical thought is to short the markets, but if you don't have a margin account and don't want to set one up, you may want to take a look at the many short exchange-traded funds (ETFs) that provide this exposure. (To learn more, check out our Short Selling Tutorial.)
Plenty of Bad News
The markets have been in choppy waters. The preliminary GDP numbers for the fourth quarter came in at 0.6% growth, a near halt in U.S. economic growth. This is better than negative growth, which would clearly indicate recession, but still raises concern that the economy is heading closer to that point. Home sales, at the heart of the economy's problems, seem to be on an endless decline, and we are seeing continued evidence of slowing consumer spending. Also, the Fed has been forced to cut interest rates drastically with a 125 basis point cut in less than two weeks. Not only is the Fed signaling that the economy's problems are real, but they are also leaving the U.S. vulnerable to an inflation hike.
Bears Not Been Hibernating This Winter
Over the last three months, the S&P 500 index has declined around 8%, but if the United States is heading into a recession, the markets have a long way to go. Traditionally, recessions see declines of around 20%. Also, if the recent decline is more due to the re-pricing of risk, the markets may have another full 20% drop left to go. Now there is the dilemma of where to invest. If you don't want the added risk of straight shorting, buying short ETFs might be the answer.
The innovation of exchange-traded funds has given even the traditional at-home investor an incredible way to hedge the portfolio. If you are worried, take a look at the Short S&P 500 ProShares (AMEX:SH). This gives you a pretty direct short against the general market. If the market goes down 1%, this ETF will be up 1%. For those who want a little more risk, there is the UltraShort S&P 500 ProShares (AMEX:SDS). This ETF has the same premise, except it is leveraged about 2.5-times, so on a 1% market decline, this ETF will be up around 2.5%.
These are the most common short or inverse ETFs, but there are others available to fit your needs. For the Dow Jones Industrial Average, there is the Short Dow ProShares (AMEX:DOG) and UltraShort Dow 30 ProShares (AMEX:DXD). And for the tech heavy Nasdaq, there is the Short QQQ ProShares (AMEX:PSQ), and UltraShort QQQ (AMEX:QID).
The point is there are easily accessible alternatives to either dumping your portfolio on a down day, or just watching you money sink lower with the overall market. These ETFs are ways to either minimize your exposure and hedge during turbulent times, or make a bet on a further deterioration of the markets. No matter what, it is indisputable that these tickers can add some benefit to investors' portfolios amid an economic slowdown.
The Bottom Line
Whether or not you are a pessimist on the current economy, it is hard to argue that the U.S. is not facing legitimate concerns that can drastically decrease the value of your investments. If this is a concern for you, especially in the short term, there are ETFs that can provide a hedge and also some extra sleep at night. If you are into more risk, the ETFs mentioned above can provide a vehicle to gain money from a market decline. These funds can definitely be a valuable addition to the portfolio in an uncertain market.
For more on the power of these ETFs, check out Inverse ETFs Can Lift A Falling Portfolio.