How To Profit From The Inevitable Sell-Off

Inverse ETFs are available on a variety on underlying stock indexes. There are even inverse ETFs that leverage the underlying index as much as three times. In simple terms, 3X leveraged inverse ETFs move 3 points for every 1 point the underlying index moves. This leverage makes them extremely volatile, and they’re designed to follow the daily motion of the index not the long-term motion. This makes leveraged inverse ETFs only suitable for short-term, sophisticated investors who fully understand the risks and how they work.

Examples of inverse ETFs include ProShares Short Dow30 (ETF) (NYSEARCA:DOG), ProShares Short S&P500 (ETF) (NYSEARCA:SH) and ProShares Short MSCI Emerging Mark (ETF) (NYSEARCA:EUM). Leveraged inverse ETFs include Direxion Daily Large Cap Bear 3X Shares (NYSEARCA:SPXS), Direxion Daily Real Estate Bear 3X (ETF) (NYSEARCA:DRV) and the aptly tickered Daily Health Care Bear 3X, among many others.

Non-leveraged inverse ETFs can be bought and held just like any stock. They are ideal for catching long-term down trends in whatever the underlying instruments are.

Risks to Consider: Shorting stocks goes against the long-term upward trend of the stock market. However, it can be a highly effective tool for profiting from negative events and other sell-offs. Theoretically, your risk is unlimited should a shorted stock keep going against your position without you taking the loss. However, in reality, stocks don’t move upward forever. Regardless, shorting stocks is risky, requiring timing and experience. Buying a put or using non-leveraged inverse ETFs is a much simpler way to profit from an expected sell-off. If you are able to time the selling, a triple-leveraged inverse ETF makes sense for a short-term holding period. Be prepared for heavy volatility.

Action to Take –> Practice shorting stocks in your demo account. Most brokers have a demo platform that allows you to practice various investments and trades. Try a leveraged inverse ETF and buying a put in your demo account as practice before using real money. Note how the investments move relative to the underlying instrument, as well as how much margin is required to short directly. If you take the time to practice shorting, your chances of not making rookie mistakes with real money increases exponentially.

This article was originally written by David Goodboy and posted on StreetAuthority.

Warren Buffett’s Top 5 Stocks

Buffett’s firm, Berkshire Hathaway, holds dozens of stocks. But these five make up 75% of its portfolio… worth $65 billion. Click here to get Buffett’s top 5 stocks plus his 16 latest buys, FREE.