Danger, Danger: Prep For A Sell-Off With These Inverse ETFs

The reasons are plentiful regarding why investors and even active traders should tread carefully with leveraged and inverse ETFs but if today's market pullback sticks around for a while, the utility of these ETFs (when properly used) has the potential to shine. Inverse ETFs are probably the best bet of the three primary ways most folks establish bearish stances. Shorting individual stocks can be costly due to the margin requirements. Buying put options is fine, but if a stock or index doesn't fall as much as you need it to before expiry, then the puts are worthless. In other words, inverse and leveraged ETFs aren't the devil of the financial world, as long as they are used as short-term trading instruments, not long-term investments. Consider the following inverse ETFs if today's glum market action is a sign of things to come. Direxion Daily Latin America Bear 3X Shares LHB Latin American stocks and ETFs have been impressive to start the year. Brazil, Chile Mexico and others have wiped 2011 from investors' memories. The good start to 2012 could make LatAm ETFs vulnerable to some near-term profit-taking. The Direxion Daily Latin America Bear 3X Shares is not for the faint of heart. No triple-leveraged ETF is, but with LHB trading for less than $12, it could prove to be a profitable hedge for a couple of days on existing positions in ETFs such as the iShares MSCI Brazil Index Fund EWZ or the iShares MSCI Mexico Investable Market Index Fund EWW. FactorShares 2X: Gold Bull/S&P500 Bear FSG FSG tracks the S&P Gold - Equity Spread Total Return Index and generates returns by establishing a leveraged long position in Gold Futures and a leveraged short position in the E-mini S&P 500 Stock Price Index, according to the FactorShares Web site. Translation: If stocks pullback and gold regains its safe-haven status, FSG becomes appealing. ProShares UltraShort Basic Materials SMN At the start of trading today, the Materials Select Sector SPDR XLB was one of the best performers among the select sector SPDRs on a year-to-date basis and with a solid January run in the books, more gains could be on the way for XLB later this year. The big "but" is when the riskier assets retreat, materials stocks are almost always part of that equation. SMN is great short-term hedge on positions in ETFs such as XLB or the Market Vectors Coal ETF KOL or stocks such as Freeport McMoRan FCX. Direxion Daily Small Cap Bear 3X Shares TZA There was evidence of a January Effect, or small-cap leadership, and that encouraged an increase in risk appetite. That scenario may also make small-caps vulnerable on the downside and that validates TZA as an ETF worth TRADING. This is one of those ETFs that can have you thinking you've mastered the market one day and pulling your hair out the next day. In the span of about five weeks from September-October 2011, TZA went from $40 to over $60 and back down to $40 again. That's a warning label. ProShares Short QQQ PSQ With the Nasdaq flirting with levels not seen in over a decade that means the tech-heavy index could easily be fertile ground for some downside savagery. PSQ is not a leveraged fund, so if the PowerShares QQQ QQQ loses 1% on a given day, PSQ will be higher by roughly the same amount. This one is useful for those looking to get their feet wet with inverse ETFs because it's fairly calm compared to the other members of this list.