When Exchange Traded Funds came into being back in the 90’s, all us “mutual fund timers” cheered, because now we didn’t have to wait until the end of the day to trade in or out of a fund and there was no longer any particular burden on the mutual fund to provide liquidity if we were selling or invest the money into positions if we were buying into the fund.
Updating my market stuff, yesterday, I happened to notice on a momentum screen that 8 of the top 13 etfs over the last 30 days are inverse etfs. I’m marked them below with a white tick mark.
With oil making new highs, it is not surprising the rest of the strong etfs are energy related.
I often get asked about hedging IRA’s, because on my hedging page at enjoytheride.com, I talk about hedging using a short on an SPY etf or shorting a S&P 500 futures contract, but IRAs at most brokerage firms won’t allow individuals to use those tools. The reasons vary from the brokerage house doesn’t do futures to you can’t short stocks in your IRA (I believe an IRA regulation).
Here’s where inverse etfs can help the cause. If you have some long positions that are either illiquid or you just want to hold them over a long period, you can still hedge the portfolio using an inverse etf. You would buy a position in one of these inverse etfs after carefully examining them for risk and how they achieve their inverse position in the index you are interested. That way you have part of your portfolio long in some stocks you still want to own and another part of your portfolio long an etf that is short the market index.
One thing to watch is that due to using derivatives to achieve their upside down holdings inside the inverse etf, you’ll find that it won’t perfectly match the inverse of the actual index. It tries to get close each day, but it will never get precisely the inverse results of the index. But hey, isn’t it a step in the right direction if a market turns into a 50% down bear?1
So, it’s not surprising that with the recent stock market weakness, 8 inverse etfs have climbed to the top of the relative strength tables. Enjoy the ride!
Investopedia.com has some more details on Exchange Traded Funds and Inverse ETFs.
Thanks, Tom. I'm not fully acquainted with inverse ETF's. Will do some research in my spare time.
Great info Tom. Nice to see you have joined substack!