While inverse leveraged ETFs can be used to hedge long positions in stocks, the way these ETFs are designed can make them an imperfect tool for buy and hold, “set it and forget it” investors.
But for active investors willing to make specific and strategic moves when significant edges appear, trading in leveraged ETFs can be a great compliment to a longer-term strategy of buying and holding stocks for an extended period.
For example, say you own a handful of semiconductor stocks. Many of these stocks have made signficant gains in recent days and weeks. And if you feel these stocks may have further gains to come, then selling the stocks now and then trying to buy them back later may be more hassle than it is worth.
A solution to this problem is to continue to hold those semiconductor and technology stocks, but to simultaneously trade around these positions using inverse leveraged ETFs like the ProShares UltraShort Semiconductors ETF (NYSE: SSG) and the Direxion Daily Technology Bear 3x Shares (NYSE: TYP). By buying into ETFs like SSG and TYP – and the ProShares UltraShort Technology ETF (NYSE: REW) – when these funds have developed significant positive edges, traders can earn gains in their ETF positions to help offset potential, short-term losses in their semiconductor and technology stock positions.
There are a number of advantages with inverse leveraged funds. The leverage means that less capital is required compared to trading ordinary short funds. And the fact that the funds are inversely-correlated makes them ideal for use in restricted accounts in which selling stocks or ETFs short is not possible.
The ProShares UltraShort Semiconductors ETF is leveraged two-to-one to the inverse of the Dow Jones US Semiconductor Index. The ProShares UltraShort Technology ETF is leveraged two-to-one to the inverse of the Dow Jones U.S. Technology Index. And the Direxion Daily Technology Bear 3x Shares is leveraged three-to-one to the inverse of Russell 1000 Technology Index.
Heading into trading on Wednesday, SSG and TYP both have “consider buying” ratings of 9 out of 10. This makes them potentially among the most attractive ETFs in the market based on historical trends that show ETFs with ratings of 8 or higher outperforming the average ETF in the short term. The ProShares UltraShort Technology ETF began trading on Tuesday with ratings in the high neutral range, but earned an upgrade to 8 out of 10 intraday in Tuesday’s session.
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David Penn is Editor in Chief of TradingMarkets.com.