Popular Inverse ETFs – TBT, SH, RWM

| August 22, 2014 | 0 Comments

inverse-etfsIf you’re like most people, you’re probably a long only investor.

In other words, you’ll invest in different types of investments like stocks, bonds, gold, or commodities. But you’ll only make money if the investment goes up in value.

In the past, long only investment strategies were the most accessible.

However, ETFs have changed all that.

Today, profiting from the decline in a particular investment is easy with the use of inverse ETFs. They’re bought and sold just like normal ETFs. You buy them at one price with the expectation that you will sell it later at a higher price and realize a profit.

All of the magic happens underneath the hood of the ETF. An inverse ETF uses various derivatives in order to profit when the underlying index goes down in value.

From an investor’s point of view, buying and selling an inverse ETF is exactly the same as a regular ETF. That makes it just as easy to profit from a decline in a particular index as it is to profit when the index goes up.

Let’s take a look the three most popular inverse ETFs based on assets under management…

ProShares UltraShort Barclays 20+ Year Treasury (TBT)

TBT is the most popular US listed inverse ETF based on assets under management (AUM). It currently has over $4.3 billion in AUM.

This ETF is designed to move twice as much and in the opposite direction as US Treasury bonds with a maturity of over 20 years. In other words, investors that buy TBT are betting on interest rates going up.

This is one prediction that Wall Street has gotten wrong.

Interest rates have been declining so Treasuries have gone up in price this year. That means TBT has gone down in value. In fact, TBT is down 28.6% year-to-date.

But the latest news from the Fed could be a turning point for interest rates. The debate surrounding the timing of the first interest rate hike is heating up.

Owning TBT is an easy way to get exposure to the long maturity Treasuries that should be hurt the most by rising interest rates.

ProShares Short S&P 500 (SH)

SH is another popular inverse ETF. It has more than $1.6 billion in AUM.

As the name suggests, SH is designed to move in the opposite direction as the S&P 500. If you’re looking for an easy way to profit from a selloff in US stocks, then SH is right up your alley.

SH has delivered on the expected performance. So far this year, SH is down 9% while the S&P 500 is up 9%.

Even if you’re bullish on US stocks long-term, you can use SH to hedge your portfolio during a market correction.

ProShares Short Russell 2000 (RWM)

RWM has amassed $841 million in AUM… the most of any inverse ETF that doesn’t focus on the S&P 500 or Treasuries.

This ETF is designed to move twice as much and in the opposite direction as the Russell 200 small cap index.

The underperformance of the Russell 2000 small-cap index has been one of the most interesting storylines of 2014. We typically see small-cap stocks outperforming large-cap stocks during a bull market.

The small-cap market has been hurt by fears about high valuations and a weak US housing market. Investors simply don’t have the risk appetite needed to drive small-cap stocks higher.

So far this year, the Russell 2000 is just about at breakeven. But RWM is actually down 2.8% so far this year. The reason RWN is down year-to-date while the index is flat is due to volatility and the way compounding and leverage work.

Don’t forget that leveraged ETFs only deliver the leveraged return on a given day. If you hold leveraged ETFs longer than a single day, there’s no guarantee the ETF will deliver gains or losses that are twice as much and in the opposite direction as the underlying index.

Nevertheless, RWM is a simple way to profit from the next selloff in small cap stocks.

Here’s the upshot…

The most popular inverse ETFs are ones that seek to deliver gains when US Treasuries, the S&P 500, and the Russell 2000 decline in value.

And you can use them just like regular ETFs to hedge your portfolio or profit from the next selloff.

Good Investing,

Corey Williams

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Category: ETFs, Inverse ETFs

About the Author ()

Corey Williams is the editor of Sector ETF Trader, an investment advisory service focused on profiting from ETFs and the economic cycle. Under Corey’s leadership, the Sector ETF Trader has become one of the most popular and successful ETF advisories around. In addition to his groundbreaking service, Corey is the lead contributor to ETF Trading Research, where he shares his insights about ETFs and financial markets three times a week. He’s also a regular contributor to the Dynamic Wealth Report and the editor of one the hottest option trading services around – Elite Option Trader.

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