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Short ETFs jump as global stock markets fall

with 2 comments

happy-bear-2-compressedShort ETFs put in a powerful performance yesterday as global stock markets tanked in advance of the 80th anniversary of the Wall Street Crash and Q3 US GDP data.

The three top performing short ETFs were JPX +14.4% (short Pacific ex-Japan x3), EDZ +13.5% (short emerging markets x3) and DRV (short real estate bear x3).

Q3 data on US GDP

Holders will be hoping for a repeat performance tonight. But this is a gamble on the Q3 data. If it comes in higher than expected then the stock market wobble this week might be over. If that data disappoints then short ETFs will power higher.

Short ETFs, particularly of the high performing leveraged variety, can be bad weather friends but not in good times. JPX is down 90% in the past year, though admittedly that can be argued to have a huge upside in a major stock market fall.

The leveraged nature of these assets works in both directions and compounds to the downside as well as the upside. There have also been many complaints about short ETFs not correctly tracking major market movements, and at least one court action is pending.

But if you are not sure about the direction of bond prices either, then what other investment option do you have in a falling market, apart from shorting individual stocks or indices which does require you to do the market timing? Short ETFs do that work for you, at a price of course.

Website readers should note that I do not recommend market positions, I simply comment and analyze them. I have just stated the main risk with short ETFs is tonight’s data.

Re-rating short ETFs

However, if the stock market has now moved from a five-month rising trend – which has decimated short ETFs – and is now on a falling trend, then I think short ETFs should be considered as a part of a rebalanced investment portfolio.

Used carefully they can protect your wealth in a difficult period. There is third party risk in the ETF manager. You should watch out for new rules that might mean margin calls in December. But if you play this game sensibly and spread your risk it ought to be profitable.

Of course, if what we are seeing in global markets is just a blip in a hyper inflation bubble in stock markets then short ETFs will be a complete disaster.

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Written by Peter Cooper

October 29, 2009 at 8:23 am

2 Responses

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  1. 3.5% GDP growth while we are still technically in the Great recession as you call it…that’s a surely an impressive number. I thought analysts were dreaming when they came up with the 3.2% estimate.

    Mo

    October 29, 2009 at 7:17 pm

  2. Peter, it seems the correction that you have been waiting for and talking about again and again for quite a few months is in process. The market is very shaky and there’s been heavy and unusual selling for the last week or so…the only difference is that no one is buying this time, even the so-called money on the sidelines.

    Ed note: I hesitate to agree in case in goes wrong again – but yes there is something very odd happening – is the US dollar crashing or rallying? I suppose we will soon find out.

    Mo

    October 29, 2009 at 1:25 pm


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