The stock market has been on an upswing for a number of years, although it has been particularly volatile in 2018 as trade war fears have heated up, suggesting that this might be the right time to consider bear market inverse ETFs.
Beyond the recent selling pressure, contrarian investors consider the overall long-term bull market to be a good reason to expect a bigger drop or a temporary bear market. When everyone thinks stocks are on their way up, enthusiasm can lead to values that are unrealistic.
Any seasoned investor knows that the conviction that stocks won’t go down is dangerous. The market is said to climb a wall of worry. Prices climb when there are people who think they won’t. This balance of selling pressure and buying enthusiasm keeps the market in balance and avoids an “overbought” condition.
An inverse exchange-traded fund (ETF) makes money when stocks go down in price. If the index the fund follows goes down 1%, the inverse ETF goes up 1%. Money managers achieve this by “shorting” the stocks on the index. Inverse ETFs bet against the market and prosper when stock prices fall.
The following are four ETFs for a bear market that are designed to short the market and make you money when stocks fall. The selections were made based on total assets. We did not select based on year-to-date yield as our criteria because the market has been volatile in the first nine months of 2018, and inverse ETFs would not be expected to have much of a yield in that situation.
You can put these ETFs on a watch list, and if you see bigger signs of trouble in the marketplace than the recent volatility, you will be ready to jump in and take advantage of a decline. All figures are current as of September 26, 2018.
SH uses the S&P 500 as its benchmark. It aims to match the performance of that index if it starts going down. It does this by investing in derivatives. This can include futures contracts, swaps, and stock options.
The fund focuses on the behavior of large-cap stocks but also watches real estate investment trusts (REITS). Keep in mind that an investment in this fund will lose money if stock prices go up. This is a fund for the short term when you think you see a temporary decline in the market about to happen.
- Avg. Volume: 2,933,929
- Net Assets: $1.31 billion
- Yield: 0.49%
- YTD Return: -8.52%
- Expense Ratio (net): 0.89%
SDS is an aggressive fund that tries to achieve two times the inverse of the S&P 500. The large-cap focus and the aim of 2x the inverse of the index make SDS a higher-risk ETF than SH (listed above).
This fund is for those who have a strong conviction that the market is going to drop. You would be expecting to make twice as much as SH. You would also be taking on twice the risk.
This fund uses derivatives to achieve its goals. This is not a long-term play. The fund is down single-digits for 2018, but was down double-digits as recently as February. Note that investors use a fund like this to take advantage of a negative market.
- Avg. Volume: 4,054,866
- Net Assets: $837.13 million
- Yield: 0.67%
- YTD Return: -12.76%
- Expense Ratio (net): 0.90%
This is the most aggressive fund on our list. It aims to achieve three times the inverse of the performance of the S&P 500. SPXU offers the highest returns of the three ETFs on our list, and it carries the highest risk. If the market turns against you, you could start losing money fast.
If you get into this inverse ETF, be prepared to watch it daily and stay abreast of any news affecting the broader market. You would use this fund to make money fast and get out at the first sign of a market recovery. On the upside, with more than 11 million shares changing hands every day, it is the most liquid of the four funds featured.
- Avg. Volume: 3,826,207
- Net Assets: $870.36 million
- Yield: 0.71%
- YTD Return: -17.83%
- Expense Ratio (net): 0.90%
This ETF is tied to the Russell 2000. You would use this ETF if you expected small-cap stocks on the Russell index to decline in price.
The fund uses derivatives. RWM is a good example of how you can invest in a way that only shorts one type of stock, while remaining “long” in stocks from another index.
- Avg. Volume: 323,385
- Net Assets: $242.16 million
- Yield: 0.45%
- YTD Return: -12.46%
- Expense Ratio (net): 0.95%
The Bottom Line
A true bear market can last a long time. Given the current condition of the market, you are more likely to take advantage of temporary pullbacks or perhaps a correction. You can make money in these downtrends by using ETFs that follow a broad index.
Three out of four of the ETFs on this list follow the S&P 500. This means you would be expecting the market, in general, to turn negative for a notable period of time. If the market turns bearish overall, these bear market ETFs will be poised to take advantage.