Stocks inched higher to start the week as investors prepared for the release of key inflation data and a Fed policy decision in the coming days. Market watchers will be looking for signs of cooling inflation tomorrow with the latest reading of the consumer price index (CPI). Last week, November’s producer price index (PPI) came in higher than expected, with a 0.3% monthly increase.
On Wednesday, the Federal Reserve will wrap up its two-day policy meeting with an interest rate decision and updated economic projections heading into the new year. Traders expect a smaller hike than the 75 basis point hikes in recent months. Still, concerns are escalating that the Fed will stretch out the hiking cycle well into the new year, possibly pushing the economy into recession as it battles against inflation.
Anyone who wants to benefit from the push and pull of inflation and climbing rates will appreciate today’s trade. Whether you’re looking to hedge your precious long-term returns or looking to turn a quick profit when things take a turn, this short-term play is accessible to all levels of investors.
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Traders who are looking to benefit from sliding stocks often turn to short-selling. The main risk of traditional short-selling is that while profit is capped (a stock can only fall to zero), the risk is theoretically unlimited. Of course, other tactics can be used to cover a position at any time, but with a short-selling position, inventors risk receiving margin calls on their trading account if their short position moves against them.
Inverse or “short” ETFs are another option that allows you to profit when a certain investment class declines in value. Some investors use inverse ETFs to profit from market declines, while others use them to hedge their portfolios against falling prices.
Over short periods, you can expect that the inverse ETF will perform “the opposite” of the index over short periods, but a disconnect may develop over more extended periods. Inverse ETFs will decline as an asset appreciates over time. For that reason, inverse ETFs typically are not seen as suitable long-term investments. Furthermore, frequent trading often increases fund expenses, and some inverse ETFs have 1% or more expense ratios.
When approached correctly, inverse ETFs can be excellent day-trading candidates and highly effective short-term hedging tools. There are several inverse ETFs that can be used to profit from declines in broad market indexes, such as the Russell 2000 or the Nasdaq 100. Also, there are inverse ETFs that focus on specific sectors, such as financials, energy, or consumer staples.
With $4 billion in assets, the ProShares Short S&P 500 (SH) is the largest inverse fund by value. Commonly used by investors as a hedging vehicle, the fund strives to deliver the inverse performance of the S&P 500 (SPX). If you’re concerned about the stock market falling, this fund moves in the opposite direction of the largest 500 U.S. corporations and is the simplest way to protect yourself. It’s important to note that SH is designed to deliver inverse results over a single trading session, with exposure resetting every month. Investors considering this ETF should understand how that nuance impacts the risk/return profile and realize the potential for “return erosion” in volatile markets. SH should definitely not be found in a long-term, buy-and-hold portfolio. The fund comes along with an expense ratio of 0.9%.