3 ETFs To Play A Market Correction

| March 4, 2013 | 0 Comments

market correctionAre you concerned the market may be primed for a fall?  If so, you’re not alone.  Take a look at a few recent headlines.

“2 Scenarios for Market’s Correction”


“A Stock Market Correction May Have Begun”

US News & World Report

“Be On Guard For A Market Correction”

Financial Times

These are just a small sample of recent headlines from major financial news publications.  As you can see, with the S&P 500 close to making new all time highs, more than a few Wall Street watchers are expecting the market to correct.

That got me thinking…

If the market does correct, how could an investor make some money from a market decline with ETFs.  After doing a bit of research, I found three ETFs that should prosper if the market takes a breather.

ProShares Short S&P 500 (SH)

SH is an inverse ETF on the S&P 500 index.  In other words, SH rises when the S&P 500 declines and falls when the S&P 500 rises.  The fund accomplishes this by investing in derivatives.

If you believe the S&P 500 is poised for a correction, SH could be a great way to profit from any decline.  As the index drops, SH should move higher in value and put some profits in your pocket.

SH is the largest and most liquid of the non-leveraged, inverse stock ETFs.  It has $1.6 billion in net assets and trades about 3.1 million shares per day.

ProShares UltraShort Euro (EUO)

The S&P 500 isn’t the only index that may be poised for a correction.  After the disastrous Italian elections last week, the already weakening Euro may have further to fall.

EUO is a way to profit from such a move.

The fund seeks daily results that match twice the inverse of the daily performance of the US Dollar price of the Euro.  So, EUO tends to rise when the Euro declines in value versus the US Dollar.

The fund is adequately liquid with $479 million in net assets and average volume of nearly 1.2 million shares a day.  What’s more, EUO has gained 9.8% over the past four weeks and is now up 2.3% for the year.

iPath S&P 500 VIX ST Futures ETN (VXX)

VXX seeks to replicate the S&P 500 VIX Short-Term Futures Total Return Index.  The index offers exposure to daily rolling long positions in the first and second month VIX futures contracts and reflects the implied volatility of the S&P 500 index.

In case you don’t know, VIX is the ticker symbol for the Chicago Board Options Exchange Market Volatility Index.  It’s a popular measure of implied volatility of S&P 500 index options.

Simply stated, when the S&P 500 corrects, volatility in S&P 500 index options tends to increase.  When that happens, the VIX usually surges in value.

And any move higher in the VIX should translate to gains in VXX.

Bottom line…

Given the market’s huge gains since mid-November, it wouldn’t be a surprise if the market corrected a bit.  If you think a correction is coming, any of the ETFs above should profit from such a move.

Profitably Yours,

Robert Morris


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Category: Currency ETFs, ETFs, Inverse ETFs, Leveraged ETFs, Market Analysis

About the Author ()

Wall Street veteran and ETF specialist Robert Morris helped created ETF Trading Research in order to help investors get the most out of their ETF investments. Before creating ETR, Robert worked for a number of prestigious Wall Street firms such as Salomon Smith Barney, UBS, Hyperion Financial and Charles Schwab.

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