Each year, analysts make predictions of an imminent downturn or correction in the markets. If investors believe the market is due for a correction, they can diversify their portfolio with investments that rise during market downturns. 

Shorting the market is a bet that the market will decline. It's possible for investors to profit with a short position. However, the market timing and the stock selections would need to be exact for a short seller to earn a profit. If the market improves and buyers rush in, the short position would have to be sold for a loss. 

Some exchange-traded funds (ETFs) allow you to short a market segment or sector instead of individual stocks. ETFs that short segments of the markets earn a profit during market downturns, or corrections within a bull market. 

ETFs that earn a profit in the opposite direction of a bull market are called inverse ETFs. However inverse ETFs carry far more risk than ETFs that take bullish positions in the market due to the volatility of the market. For example, if a sell-off reverses, short sellers might rush in to unwind their short positions, by buying back the stock they had shorted, thus exacerbating the bull move higher. 

Below are ETFs that profit from bearish moves in the market segment they cover. Average volume of some of these ETFs may be low due to fewer investors taking short positions in these segments. Also, new funds may not have enough history to determine a profitable trend for the ETF. 

All information is current, as of September 25, 2018.

1. ProShares Trust – ProShares Short S&P 500 (SH)

The S&P 500 is a measure of large-cap U.S. stock market performance. This fund takes short positions in the index, making it a broad-based method for shorting the U.S. stock market.

  • Avg. Volume:    2,983,279
  • Net Assets:    $1.31 billion
  • Yield:    0.49%
  • YTD Return:      -8.52%
  • Expense Ratio (net):      0.89%
  • Inception Date:  June 19, 2006

2. ProShares UltraShort S&P 500 (SDS)

This aggressive fund aims to earn twice as much as what the S&P 500 loses. Like the ProShares Short ETF mentioned above, the UltraShort is large-cap focused; however, it's a higher risk version of the UltraShort. SDS uses derivatives to achieve its goals, is not a long-term play and is best for investors betting on a bearish market.

  • Avg. Volume:    3,952,928
  • Net Assets:    $870.36 million
  • Yield:    0.71%
  • YTD Return:      -17.83%
  • Expense Ratio (net):      0.90%
  • Inception Date:  July 11, 2006

3. Direxion Daily CSI 300 China A Share Bear 1X ETF (CHAD)

If you expect China’s economy and market to stumble, you can use this ETF to short the CSI 300 Index. This fund shorts the largest stocks in the Chinese market.

  • Avg. Volume:    16,825
  • Net Assets:    $121.94 million
  • Yield:    0.27%
  • YTD Return:      19.39%
  • Expense Ratio (net):      0.79%
  • Inception Date:   June 17, 2015

4. Direxion Daily Total Bond Market Bear 1X ETF (SAGG)

The Federal Reserve has indicated it will continue to raise interest rates going forward. Higher interest rates tend to hurt bond prices. You can short the Barclays Capital US Aggregate Bond Index with SAGG. However, note that the volume is very low and therefore there is liquidity risk meaning you might not be able to place a trade due the lack of volume.

  • Avg. Volume:    268
  • Net Assets:    $3.19 million
  • Yield:    0.52%
  • YTD Return:   3.89%
  • Expense Ratio (net):      0.45%
  • Inception Date:  March 23, 2011

The Bottom Line

Shorting individual stocks can be riskier than buying ETFs that short the market. Although a company's weakness must be identified, it's also important to look for market weakness. With an ETF the shorts the market, investors have the diversification of shorting several stocks instead of only a single stock. As a result, the risk of losing money is spread out with ETFs. 

For more on shorting the market, please read the Risks of Short Selling, and the Top 4 Inverse ETFs for a Bear Market.