The Top 5 Bear-Market ETFs

By Ryan C. Fuhrmann | February 03, 2013 AAA

Successful fiscal cliff negotiations to kick off 2013 and a more recent positive report regarding employment and manufacturing activity in the United States helped the stock market reach a five-year high during the first trading day of February. The run is a worrisome trend to a number of stock market prognosticators and other market participants who believe domestic markets still have considerable work to do in order to shed the weak fundamentals stemming from the financial crisis. For more bearish investors, below are five funds that should benefit if the market overall, or certain asset classes, fall from their highs.

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ProShares Short S&P500
The ProShares Short S&P500 (ARCA:SH) offers investors one of the more straightforward ways to bet against the stock market. This exchange traded fund (ETF) simply seeks to match the inverse of the daily performance of the S&P 500, which, along with the Dow Jones Industrial Average, is considered the most common index to indicate the performance of U.S.-based companies. Despite the recent bull run, the ETF has managed to hang on to more than $1.6 billion in assets, which makes it a rather liquid way to go short the domestic stock market. The expense ratio of 89 basis points (BPS), or 0.89%, is rather lofty for an ETF, but is unlikely to be a concern to traders who might expect the market to fall significantly from current levels.

ProShares Short Dow 30
Another ProShares offering, the ProShares Short Dow30 (ARCA:DOG), seeks to match the inverse of the Dow Jones Industrial Average, or index of 30 of the largest companies in the United States that are widely considered blue chips, or industry bellwethers. As detailed above, the Dow is one of the two most widely quoted domestic stock market indexes. An important difference to be aware of is the S&P 500 is a market-cap weighted index, while the Dow is price weighted. This means the companies with the highest market capitalizations heavily influence the S&P500, while the companies with the highest stock prices impact the Dow the most. Both ETFs represent a way to bet against large companies, and the Dow 30 ETF does so by charging a slightly higher expense ratio of 95 BPS.

SEE: Using ETFs To Build A Cost-Effective Portfolio

ProShares Short MSCI EAFE
The domestic market is bumping up against its highs over the past five years. This is due in good part to improving economic growth across the globe. For investors more pessimistic on the prospects of international firms and their respective markets, the ProShares Short MSCI EAFE (ARCA:EFZ) lets investors bet against the MSCI EAFE index, one of the most common international equity indexes. The ETF only has around $100 million in assets and charges an above-average 95 BPS, but it's geared to benefit, should global growth struggle or European sovereign debt concerns start to escalate again.

ProShares Short High Yield
The ProShares Short High Yield
(ARCA:SJB) seeks the inverse of the daily price performance of the Markit iBoxx $ Liquid High Yield Index. Investors may have noticed that high-yield bonds, which is just a euphemism for junk bonds, is in the midst of a strong bull run as investors bid up these bonds to boost the overall yield in their portfolios. A reversal of rising junk bond prices would do wonders for this ETF. Expenses again stand at 95 BPS and the fund is a newcomer, having been rolled out back in March of 2011.

SEE: The Top 5 Inverse-Bond ETFs

ProShares UltraShort Gold GLL
In addition to being able to bet against stock and bond market indexes, the proliferation of ETF offerings has moved into specific asset classes. The ProShares UltraShort Gold (ARCA:GLL) lets investors bet against gold, which has experienced a meteoric rise in price over the last decade. Gold tends to serve as a haven asset, and this ETF seeks to mirror the inverse return of gold bullion. The precious metal has benefited from the Great Recession and a wave of uncertainty regarding the outlook for the U.S. economy. Investors more bullish on a rebound might seek to benefit from a shift out of gold and back into stocks.

The Bottom Line
Creativity on the part of the financial services industry means there are new ways to benefit from both market ups and downs. Bearish investors have the opportunity to gain from betting against a market rise, and the above ETFs are top offerings to let them do so.

At the time of writing, Ryan C. Fuhrmann did not own any shares in any company mentioned in this article.

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