Inverse ETF Riches for 2008-2009

By Travis Johnson, Stock Gumshoe, September 27, 2008

This is just a quick note to let you know about part of what Martin Weiss is trying to sell you as part of a subscription to his Safe Money Report (now there’s a loaded name for a newsletter, eh?).

He’s offering all kinds of stuff that’s designed to appeal to people who are terrified that the markets will go down, but one of the things he’s offering is a special report called Inverse ETF Riches for 2008-2009, a report that he thinks is a $79 value.

Here’s the sales pitch they’re throwing out:

“In this report, you’ll discover …

“How anyone can buy inverse ETFs as easily as any other stock or ETF, in any brokerage account …

“How to use these special investments to minimize losses in the stocks you can’t afford to sell now …

“How they can hand you up to $2 in profits for every $1 decline in the major indices and the weakest sectors …

“Our proprietary four-step approach to using them to help minimize your risk and maximize your profit potential …

“Our comprehensive list of 38 inverse ETFs you should be considering now, including links to the websites that tell you everything you need to know about each one of them … “

OK, so is any of that stuff secret? Well, I can’t tell you what their “proprietary four-step approach” for trading these things is, but I can answer the other questions for you:

The company that packages these Inverse ETFs, which are also called Reverse ETFs or Short ETFs, is called ProShares, and believe me, they make no effort to keep these products a secret.

How can you buy them as easy as any other stock or ETF?
That one’s easy, these are just ETFs that happen to represent the reverse of an index’s return. They have stock ticker symbols, and you place buy or sell orders for them exactly the same way you buy any other stock or ETF.

How can they hand you up to $2 in profits for every $1 decline? That’s no secret, either — there are two different kinds of short or inverse ETFs, the regular Short and the UltraShort. Short ETFs give you a return that is opposite the return of the index in question, UltraShort ETFs give you a return that is twice the oopposite of the return of the index.

So if the S&P 500 goes up 5%, the S&P 500 Short ETF will go down 5% and the UltraShort version will go down 10%. If the S&P 500 goes down as you’re betting, the result is a positive return for the short ETFs in the same proportion. Not every index has both a Short and an UltraShort ETF, but many do.

And that list? The “comprehensive list of 38 inverse ETFs you should be considering now, including links to the websites that tell you everything you need to know about each one of them?”

Well, for that you can pay Martin Weiss if you want — or you can go straight to the horse’s mouth for what I would wager is the exact same information. If you want the full details about each of the 38 Short and UltraShort equity ETFs available, you can just go to the ProShares site here to see what’s available.

Yes, that’s right — this isn’t an editorially selected list of the 38 ETFs you should consider. ProShares only has 38 Short and UltraShort equity ETFs (they also have two that short bond indexes, FYI). The list includes their names, tickers, current prices and the Net Asset Value (the fair price against the index, which might sometimes be slightly different than the price the market is willing to pay) and you’ll find that each one links to a full description.

So … do you want to buy these? Well, if you want to hedge against the market, or against some holdings that you would prefer not to sell, it might make sense to bet against the market in this way. And if you just are certain that a particular sector will go down, this is one relatively easy and unleveraged way to bet on that.

For many of these indexes you could also buy puts, as you could for individual stocks, but that carries with it a very different set of risks — buying put options, which is also a way to bet that a stock or ETF will go down, means you’re betting on a particular time period, and that if you’re wrong you’ve got a good chance of losing all your money thanks to the leverage and premium that are part of almost all options trades. Being short through an ETF might feel frightening or risky, but with a regular short ETF you’re only ever going to lose as much as the long investors win, you won’t lose all your cash, absent a massive 100% move in the markets, as long as you’re not buying with borrowed money. And they trade with some liquidity, so you can usually get out of your trade more easily and at a fairer price than you can typically sell puts in an advancing makret, and you can use things like protective stop loss orders with some confidence (no guarantees, of course).

There are a couple things to think about as you consider whether or not to buy into one of these ETFs:

1) They aren’t secret. You’re not getting in on anything that lots of active and institutional traders don’t know all about. It might be a good investment, but it’s not going to make you rich by nature of its mystery.

2) They’re fairly expensive. Expense ratios are all listed on the ProShares site, all the ones I’ve looked at have annual expense ratios of .95%, which is very high for an index ETF, though of course these are very different than regular index ETFs.

3) Making emotional, rash decisions on the short side when the market is in a panic can be just as unprofitable as trying to jump on a hot stock when it’s moving up rapidly.

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4) These are great tools, and like any tool, they’re best used by people who understand them. Do your research, understand how you might react to big moves up or down in these ETFs, and think about why you’re considering an inverse ETF.

And be extra careful that you are prepared for the volatility of the UltraShort ETFs — if you’ve been around the market for a long time you’re probably still conditioned to think about indexes as slow-moving diversified investments, but some of these sector UltraShort ETFs, in particular, can move extremely fast, especially in a crazy market such as we’re living through right now.

Remember, if the market changes its mind dramatically about the financials and has a huge relief rally in that sector of 12%, that means the UltraShort Financials ETF would go down by 24%, quite possibly before you had a chance to do a thing, especially if it’s another weekend bombshell. (I own a few shares of that ETF, so that’s a position that I’m in at the moment — keeps the blood flowing.)

I have no problem with Short ETFs, and like to tinker with them sometimes, but with the UltraShort Financials ETF (SKF), which is understandably the most popular at the moment, it’s not unusual to see 20% intraday moves lately. That can either spike your adrenaline and make you think you’re bulletproof, or drown you in despair, depending on which side you’re on. I like gambling, which is why I find them interesting sometimes, but make no mistake — in the short term, particularly in this environment, buying the SKF is gambling (unless you’re just hedging).

And one small note on the short financials ETFs: Remember that rule the SEC passed that said you’re not allowed to sell financial companies short? That means that ProShares is no longer creating new shares of the Short Financials (SEF) and the UltraShort Financials (SKF). You can still trade them, and there are plenty that existed before the rule changed, but since no new shares are being created, at least temporarily (the rule currently runs until October 2, but it might be extended or modified by the SEC), it’s possible that SKF and SEF might move apart from their index if demand either falls or rises significantly. So far they’re still quite close to their NAV, within less than a percent, but that may not continue next week, or into the future if the no-shorting rule is extended, as long as they’re not making new shares it’s possible that these could trade at significant premiums or discounts a la Closed End Funds.

To tell the truth, even though I like to gamble a little, I’m most comfortable talking about these ETFs as tools to hedge against long term positions that you don’t want to sell — that way, you can win either way or, if you’re committed to a few stocks, you can at least protect yourself on the downside if you happen to be wrong. You can also use them for broad sector bets, but be mindful that most sectors include both the failing companies you hear about, and plenty of successful companies you don’t — the full descriptions of these indexes will tell you which stocks are in each index. Hedging can be considered a broad thing, too — if you have a big position in S&P 500 ETFs but you’re worried that one sector will bring down the S&P, you can always put on a hedge in a Short or UltraShort sector ETF. Of course, if you’re wrong you’ll just depress your returns.

If you don’t know what I mean by hedging an existing position, a typical example would be this: You have a big position in Citigroup because you inherited it from your Grandma, or it’s in your employee retirement account, and you don’t want to sell it for tax reasons or because your boss won’t let you — if you buy a position in the UltraShort Financials ETF you can at least hedge some of that position, since if Citigroup falls that ETF is likely to spike up. There are similar examples across the sectors and market styles, if you have an outsize position in a particular industry it can be worthwhile to hedge that position with a Short or UltraShort ETF (you can also hedge individual stocks or ETFs directly by buying puts against it, but as I said that’s a time-constrained and sometimes hard-to-trade solution) — In whatever case, if you decide to hedge like this know what you’re doing, and why, and when you might want to sell, because that hedge does make your investing more expensive.

If you want to use some wild leverage, you can also buy call options on an UltraShort ETF — which adds leverage on top of leverage, and gets rid of the liquidity. Those options premiums are very high for most of these ETFs, but if you like rollercoasters and don’t vomit easily, don’t let me keep you from your fun.

So … no exciting tease today, but I’ve had a lot of folks ask me about these and forward similar emails — I hope the ProShares site gets you at least a start on understanding what they are and what you’re doing when you invest in or trade these Inverse ETFs.

Full disclosure: As of this writing I currently have a small position in the UltraShort Financials ETF (SKF) with a stop loss order in place, so I could close it at any time.



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September 27, 2008 10:43 am

I day trade ETF’s and it is a rush! However, if anyone out there wants to try it, beware. You can’t go to the bathroom and you need to keep your finger on the buy/sell button. These things move FAST.

September 27, 2008 11:05 am

Unfair jab, Don Quixote. Weiss’s explainations of the nuts and bolt of the current economic downturn, predictions for the likely outcome and clearly explained advice for dealing with the sharp downside were repeated ad nauseum in his newsletter since I began been reading them in 2002.

elissa S.
elissa S.
September 27, 2008 1:00 pm

Gumshoe, not only are the specialty inverse ETF’s impacted by the new rule regarding shorts, so are the stocks within the broader index etf’s, since they contain financials and insurers.
And one more thing, be very careful of the ETN’s. These are notes dependent upon the credit of the underwriting company. So, if you buy an ETN underwritten by Deutsche Bank, for instance, you’d better be convinced that Deutche Bank is in excellent shape. If you want to go into the currency markets as a hedge for example, many of those funds are actually ETN’s. As always, due diligence is the key.
Lastly, options are also impacted. If you bought a put, you can trade it, but you can’t exercise it and purchase the stock. Even though the ban is thru 10/2, don’t be surprised to see this stupid rule extended thru the election.

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September 27, 2008 1:11 pm

For some of you interested in the “how” of the paid subscriptions that Weiss & Co are selling, I found a couple of clues in past newsletters and…Google (wonderful thing, that;)

Dr. Weiss has a relatively small crew of people working with him that specialize in various sectors, all of which write the copy for their own dedicated free-news-advice-teasers, contribute to his massive (mostly free) generic-advice articles, and author the articles in the paid features like the ones noted above.

One of this group is Tony Sagami.

He and Dr.Weiss apparently paired up to work out mutual-fund trading strategies years ago, including Weiss’s ranking and momentum theories and Sagami’s customized software from his trading software outfit called “Monocle.”

Although it has not been updated in a ‘long’ time as far as the publicly purchasable version, the ‘latest’ release is “Monocle 2” and appears rather obscurely here:
and you’ll find both that Tony Sagami owns and developed it for their managed portfolio service, see references to the “Weiss Trading System”, and see that this is a do-it-yourself back-trade testing, strategy tweaking software mostly setup for comparing mutual funds…and perfect for these newer “ETF’s”, since it’ll do the same for stocks, though you can do most of the stock stuff online.

So I wondered why they wouldn’t be marketing the heck out of this over at Weiss?
Apparently, you don’t make a ton of money out of $325 software sales to do-it-yourself investors.

But the monthly one-time set of paid feature booklets above?
ETF monthly trading-orders subscription is…$98!
And the button-on-the-trigger instant emails every time there’s a trade to make service is about $2,000…

Or you hand them your portfolio and have them manage the account for you in exchange for a percentage like any good hedge-fund manager would do…and Weiss actually has a pretty good track record since the ETF’s multiplied.

And they’re using their own custom settings for implementing these ETF trading signals with probably a further-customized version of this Monocle II software, with guys who must know how to use it in-house following the signals. Their in-person training seminars are at some small office in “Bigfork, MT.”

As for the signals they use, I read everything I could find on using their custom software for this “Weiss System” and it’s at least based on:
1 – determining an RSI-like ranking for funds similar to the way stocks are graphed.
2 – determining current Alpha compared to a benchmark…and all past how-to posts tell me they are using the S&P 500, though any could be used.
3 – Looking at Beta to reject high-Alpha candidates that are moving the wrong way
4 – I’m not sure, since we get into grey water after that…but they are looking for turn-arounds with positive MOMENTUM and rising volume using liquid funds/ETF’s compared to a benchmark (SPX).
Sounds like feeling-out which sectors are catching (or losing, for inverses) the cash flow of large institutionals and market moves, in time to ride each ‘wave’ up and drop out soon but after they top, without worrying too much about day-trader-type timing.
OK, there’s the end of my investigatory skills.

Just so you know – it looks like to buy that Monocle software and use it, though, you have to sign up for an annual subscription to download the daily market close data from some – possibly proprietary – source, since there is no mention of it connecting realtime to free Yahoo financials or anything similar.

I downloaded the demo to get the above info, and just Googled the heck out of everything I found on the site.

Hope somebody found that useful or at least informative 😉

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September 30, 2008 9:25 am

Weiss was pointing out the liklihood of this mess a long time ago (2002?). He didn’t say when it would happen, only that it would happen – kind of like the prophets of old.

David Hall
David Hall
September 30, 2008 8:51 pm

I have been trading call options on SKF, the double short Financials ETF (so it’s like trading put options on financial stocks). I just ride the see-saw of the market – buy when the options go back low and sell when they go back up – so I sold the day the market (DJIA) went down 777 and bought back the same the next day (today) for about two-third of the selling price. It’s at least a 25% swing each time. Oh yea, it’s like gambling but being in this market now is like gambling anyway.

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