Market Direction as investors saw yesterday is totally fixated on the Euro Crisis and many investors must be starting to wonder about these Ultra Bear ETFS they hear so much about. With Greece set to vote once again in a June election this basket-case nation has investors concerned worldwide. No matter what the outcome of the June Greek Election the perception of investors is that the Greek crisis will mean an Italian, Spanish, Irish and Portuguese Crisis and therefore a Euro Crisis. What investors fail to understand is that the European Central Bank cannot intervene in the political mess of countries like Greece. Their mandate does not include running governments. Each of the European Nations within the Euro is a separate political entity and the ECB (European Central Bank) cannot get involved. The call by many investors and Europeans for the ECB to shore up Europe’s banks and create a larger fund for Euro Members to draw upon is filled with problems at best. Allowing countries like Greece or Spain to keep propping up their economies through endless borrowing is a second disaster in the making. The truth hurts but in the end countries like individuals cannot borrow forever without some assurances they have their financial houses in order. The Euro crisis in my opinion, will not be going away any time soon and the belief among investors that the bull is just waiting to reappear is foolhardy. Market direction remains down and any rallies are simply opportunities to unload stocks picked up in the market downturn.
Yesterday’s sudden market direction shift from up to down shows how unsettled investors are. What can investors consider doing at this stage to hedge their portfolios in what looks to be a hot summer ahead. Many investors could simply sell their holdings and move to the sidelines which is what a lot of investors are obviously doing.
Other investors including long-term dividend investors could consider Ultra Bear ETFS.
Consider Ultra Bear ETFS When Market Direction Moves Lower
There are many bear funds available including Ultra Bear ETFs that provide Two Times and 3 Times S&P 500 market direction moves. The Ultra Bear ETFs have to be carefully monitored though as there is slippage in these leveraged funds over time, but for short-term day-to-day moves these funds make for decent returns.
Ultra Bear ETF – HSD
For example in Canada, Horizons BetaPro Bear Funds come in many flavors to suit just about any investor. Their S&P 500 Ultra Bear ETF symbol is HSD which since May 2 2012 is up 15.7%.
Ultra Bear ETF – SDS 2X ETF
There are dozens of Ultra Bear ETFs available. One of the more popular Ultra Bear ETFs is SDS which is up 16.43% since May 2 2012.
Ultra Bear ETF – SPXU 3 X ETF
For the more adventurous investors the SPXU Ultra Bear ETF is a 3 Times Fund that provides 300% of the daily moves in the S&P 500 and has more slippage than the 2 X Ultra Bear ETFs particularly when an investor stays in the fund longer than a few months. The slippage in the fund occurs on neutral to up days as the whipsawing in the market tends to skew the percent returns. Nonetheless it is a practical method to hedge a portfolio. Just remember that when the market direction changes to up, these Ultra Bear ETFs lose value quickly. The SPXU will lose value faster as it is a 3X Ultra Bear ETF.
Active Bear ETF – HDGE
Other investors might prefer a more managed approach. The HDGE Bear ETF is managed by Ranger Alternative Management and they attempt to hedge by selecting short positions in securities that they believe will provide superior returns as those securities deteriorate in value. The whole concept behind HDGE makes sense. They scour securities looking for companies with low earnings quality or poor balance sheets that will fall in value. HDGE is promoted as not just a bear fund but an ETF that can be traded no matter what the market direction. Is it true? Not really.
The chart below shows HDGE ETF since inception and it despite the active management, HDGE is a better ETF for corrections and bear markets. HDGE Active Bear ETF commenced in Jan 2011. The summer 2011 selloff is seen in the red circle and shows the overall improvement in this Bear ETF. The spring 2012 rally though shows that even poor companies with terrible balance sheets can rally during market upswings. The blue square show the loss in HDGE from the early Oct 2011 period when it set a high of $30.76 to the end of March 2012 when it set a low of $20.01. This amounts to a loss of 34.94% and those who held HDGE during this period have a long way to go to recoup their losses even with the current selling.
Therefore despite what advertising may try to convince investors, HDGE is an ETF best saved for bear markets or strong market corrections.
Use Bear ETFS To Hedge Against Market Direction Pullbacks
There many more Ultra Bear ETFS and straight Bear ETFs available. But the message is clear to investors. When the market direction changes if investors are not able to trade options or believe they do not have the ability to successfully trade options such as the SPY PUT option then hedging through bear ETFS makes sense.
The problem with Bear ETFS is the number of shares an investor needs to purchase to Hedge a large portfolio. For example, even a $100,000.00 portfolio is not the easiest to hedge with Ultra Bear ETFS. The SPXU which is a 3 Times Bear ETF requires quite a few shares to be purchased.
If an investor was expecting a 5% correction and wanted to protect his $100,000.00 portfolio for $5000.00 in losses, he would have to purchase quite a few shares of SPXU. 500 shares at the May 2 2012 price of $45.20 would only return about $3300.00 should the market fall 5% and the investor was able to earn 3 X the 5% retreat. 500 shares of SPXU would amount to $22600.00 in capital tied directly to an ultra bear ETF that can fluctuate widely.
Problem With Ultra Bear ETFs
While everyone knows about the slippage factor in an Ultra Bear ETF, many forget that just one day can see enormous losses. The SPXU Ultra Bear ETF 3 X fund for example created a 5.5% loss in just the past two days. Without the ability to use market timing indicators and have confidence in their direction call, investors can lose their profits quickly.
Ultra Bear ETFs Summary
Hedging is not as simple as many analysts make it out to be. In fact many analysts do not understand the mechanics behind hedging an actual portfolio of stocks whether these stocks are long-term or short-term investments. For dividend stock holders who have a long-term horizon there are many other alternatives including selling at the money or in the money calls on their dividend stocks when the market breaks the 100 day moving average. Depending on the stocks held, selling covered calls when the overall S&P 500 breaks the 100 day moving average has been a decent strategy which has paid interesting returns to long-term investors who have tired of the constant mood swings of the stock markets over the past 12 years.
For day and swing traders the Ultra Bear ETFS make a lot of sense as does using the SPY PUT hedge. For the remaining investors who have a shorter term horizon but do not want to use options to hedge their positions, they can consider selling out and moving to the sidelines to wait for a clear market direction up signal. They could also consider smaller positions in the Ultra Bear ETFs and remain vigilant in watching the market direction for the change that will signal an end to the bear or correction and a resumption of the uptrend. That way investors could at least benefit somewhat to the downturns in the market and still enjoy a degree of protection, but overall to hedge a full portfolio of stocks through ultra bear ETFS is not as easy as many think.
Ultra Bear ETFS External Links
Ultra Bear ETFS – Horizon Exchange Traded Funds
Ultra Bear ETFS – ProShares Ultra Pro ETFs
Ultra Bear ETFS – Advisor Shares HEDGE (HDGE) ETF
Ultra Bear ETFS Internal Links
Ultra Bear ETFS – Learn From The Bear Series