ETF Trading Strategies: Short ETFs and 3 Ways to Win with Defense
Stocks are off to a weaker start as early profit-taking has brought the S&P 500, Dow and Nasdaq Composite down by more than 1% within the first half hour of trading.
Most of the time when we talk about ETF trading strategies, we are talking about directional approaches, ways of trading oversold ETFs to the upside and selling short overbought ETFs. Our high probability, mean reversion approach to trading helps short term traders take maximum advantage of opportunities that develop and last only a few days by only buying undervalued ETFs and only selling short those that have become overvalued.
ProShares Short S&P 500 ETF
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In this way, we avoid the momentum game of chasing ETFs higher and lower. We would rather be the savvy shopper who is doted on by eager-to-sell merchants instead of acting like the one among the hordes of desperate customers, waving our fistfuls of money, demanding to be served at any price.
But another way that ETF traders and investors can make short ETFs part of their trading strategy is by using them as hedges. For traders who may be long a portfolio of stocks, for example, taking advantage of the market’s strength since the first half of March, selling too much of a winning position may not be the preferred strategy. However, by buying short ETFs, exchange-traded funds that track the opposite of their underlying benchmark, ETF traders and investors can essentially buy “downside protection” that will allow them to make money, or at least protect gains, in the event of a market correction.
ProShares Short Dow 30 Index ETF
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What sort of short ETFs lend themselves to hedging in this way? It depends on the stocks your are seeking to hedge or protect, but generally index ETFs such as the ProShares Short S&P 500 Index ETF
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ProShares Short Russell 2000 Index ETF
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Buying equal dollar amounts of ETFs like these to match the dollar value of the relevant portions of your stock portfolio may go a long way toward both smoothing the volatility of your positions, as well as helping ensure quality returns in both rising and falling markets.
Our highest Short Term PowerRatings stocks have outperformed the average stock by a margin of nearly 17 to 1 after five days. Click here to start your free, 7-day trial to our Short Term PowerRatings!
David Penn is Editor in Chief at TradingMarkets.com.