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 lo