If you have a feeling that we’re in for in for a market slide, you’re in luck. While others complain about how much money they are losing you could be stuffing your pockets. For most people, investing comes down to buying mutual funds, stocks, ETFs and hoping that they increase in value, and the most common method to fight a declining market is to have money in cash or stocks. Well, there is another way.
Without getting into the mechanics of how selling a stock short works, in the most simple terms it means that you make money when the stock goes down as opposed to going up. This practice carries a number of risks that aren’t associated with typical investing and is an advanced technique that most people don’t use. In fact, this type of trading isn’t even available in most accounts by default, especially retirement accounts.
Introducing Short ETFs
The good news is that you don’t have to be a savvy investor speculating on individual companies in a margin account to make money from declining stocks. There is actually a class of ETFs that work the same as a regular ETF but the difference is that you make money when the underlying index goes down instead of up. There are many different short ETFs available, from broad-based indicies to individual sectors and market cap.
For example, if you had a hankering that the Nasdaq was going to head into a losing streak you could simply buy some Short QQQ (PSQ) and if the Nasdaq does decrease in value, you will actually make money. Or maybe you think the subprime lending mess is going to hit the financial sector really hard, you could profit from banks losing money by picking up some UltraShort Financials (SKF).
A Diversification Strategy
If 100% of your portfolio’s success is determined by how much the stock market increases it might make sense to hedge your bets a little bit with some holdings that go up when things are going down. Obviously this isn’t the type of diversification we’re used to where you diversify with bonds or cash, but it is something worth exploring. I’m not going to get into any specific strategies using these tools, I just wanted to bring it to the surface so people are aware of it.
These types of ETFs are not for everyone and they carry a certain amount of risk just as any other specialized investment does. It takes a new way of thinking to actually consider making money from a declining market. But, if you’re tired of diversifying with bonds you may want to explore other opportunities which could actually increase your returns instead of simply trying to minimize losses.
Author: Jeremy Vohwinkle
My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.