Todd Shriber: Several times in this space I have extolled the virtues of and pointed out cautionary examples regarding inverse ETFs. Overall, I’m a fan of these products when used properly, but the reality is inverse ETFs aren’t every investor’s cup of tea. Along those lines, I’ve been flooded with questions lately from investors that want to establish bearish or defensive positions without using inverse ETFs or without directly shorting individual stocks.
So I decided to devote this week’s column to ETFs that can be used to replicate a short position on other ETFs. Best of all, the funds I’m going to mention are plain vanilla long ETFs so the risk in holding these funds for extended periods is significantly less than it is with inverse and leveraged ETFs, plus the fees on non-inverse ETFs are traditionally far lower than they are on inverse and leveraged funds.
With that, one of the most frequently asked questions I’ve been getting lately is about how to short oil without actually shorting oil. Basically, folks have been asking me how to take advantage of oil’s (brief I believe) downturn without using an extremely volatile product such as the PowerShares DB Crude Oil Double Short ETN (NYSE:DTO). Personally, I’m no fan of airline stocks as long-term holdings, but they make for decent short-term trades and the Guggenheim Airline ETF (NYSE:FAA) has been soaring as oil has plummeted.
As the chart shows, you’ll sacrifice some gains with FAA compared to DTO, but FAA also does a pretty good job of delivering an inverse correlation to the U.S. Oil Fund (NYSE:USO) all while keeping you out of a good deal of the volatility involved with an inverse oil ETF.
I’ve got another example for you and it comes from one a sector that is a fine place to be bearish on right now: Financial services. While not as volatile as oil, bank stocks are still considered a high-beta market segment and despite some dividend increases earlier this year, payouts are still nowhere near their pre-financial crisis levels. Not to mention there is still substantial headline risk facing this group.
There is also substantial risk in fooling around with an ETF like the ProShares UltraShort Financials (NYSE:SKF) for anything longer than a couple of weeks. Have a look at the PowerShares Financial Preferred ETF (NYSE:PGF), which does NOT move in lockstep with regular long bank ETFs. Plus, PGF has a yield of almost 7%!
Obviously, SKF is the better pure short play on financials, but if you ask me, I’ll take PGF, its steady performance and yield along with the ability to get a good night’s sleep (something SKF could easily deprive you of) over SKF any day.
The bottom line is that with ETFs investors can be short or bearish without actually significant risk and that’s a good thing in this market environment.
Todd Shriber is an ETF fanatic, a former hedge fund trader, and a journalist. Todd started his professional career with Bloomberg News, where he covered banks, energy and technology. After leaving Bloomberg, Todd became a trader at a California-based hedge fund where he specialized in trading financials, energy, basic materials, and ETFs.
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