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ETF Talk: Going Short in a Big Way

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10/05/2011

With negative sentiment reaching all areas of the globe, this week’s ETF Talk highlights one of the ways to profit if the market continues to fall.
 
One of the most volatile equity markets is the NASDAQ, a stock exchange that is heavily weighted toward technology companies. As a result, it is highly sensitive to market sentiment and the latest financial news headlines.
 
Markets typically need growing economies and easy access to capital to climb and those conditions do not exist right now in many parts of the world. When the economy falters, as it is in the United States these days, stocks tend to fall. The best way to take advantage of this adverse investing environment might be to buy shares in the ProShares UltraShort QQQ ETF (QID). This exchange-traded fund (ETF) seeks daily investment results, before fees and expenses, that correspond to twice the inverse of the daily performance of the NASDAQ 100 Index.
 
When the markets are as sensitive as they are right now to rumors and headline risks from overseas, it can hurt equities pretty much across the board. That situation holds true even when public companies have little exposure to Greek debt or sovereign credit downgrades in the United States, Italy and elsewhere. While equities suffer, QID is poised to rise. If you add QID to your portfolio when markets are tanking, it offers a way to hedge any equity positions that you still own and gives your portfolio a chance to notch some gains among your other positions. Naturally, you’ll want to exit QID and any other short positions that you own once the markets start to recover. Until that happens, QID is a fund that you may want to consider buying, depending on your personal comfort with risk. 
 
If you still have doubts, let me point out that QID is up more than 15% in the last three months during a time when the technology sector has been badly bruised amid worsening economic headwinds. If you have a technology sector-heavy portfolio, QID can help you to stem your losses as the market continues to punish tech.

One important detail about QID is that it seeks returns of -2x the return for a single day. This means that QID is recalculated everyday, based off of the net asset value (NAV) of the NASDAQ 100 Index. Due to the effects of compounding returns, QID will not replicate the index over a long period. So, while QID does replace -2x each day, it won’t behave the same over a long period in performance terms. It is important to monitor your position in QID, even daily, if you have the time.
 
As always, if you want my advice about buying and selling specific ETFs, including appropriate stop losses, please consider subscribing to my ETF Trader service. As usual, I am happy to answer your ETF-related questions, so do not hesitate to email me by clicking here. You just may see your question answered in a future ETF Talk.

 

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