Sometimes, It Pays To Be Short

These days, the more U.S. equity markets are open, the more it seems the bull market born in 2009 is dead. The S&P 500 is down more than 9 percent over the past week, nearly 11.6 percent this month and almost 19.5 percent in the fourth quarter.

Cementing the death of the bull market is this factoid: the S&P 500 is 20.28 percent below its 52-week high.

What Happened

When markets falter, some investors turn to long/short strategies and the related exchange traded funds. As the name implies, those products simultaneously offer investors bullish and bearish exposure, but the result of the long exposure is that long/short strategies are usually just less bad than traditional long ETFs when markets decline.

Being outright bearish has recently been paying off. Just look at the AdvisorShares Dorsey Wright Short ETF DWSH.

Why It's Important

As its name implies, the AdvisorShares Dorsey Wright Short ETF is a pure bearish strategy. As such, the fund is on fire and in a good way. On Monday, just seven U.S.-listed ETFs hit record highs. DWSH was one of those seven.

The bearish fund is now up more than 18 percent in the fourth quarter and nearly 31 percent year-to-date. DWSH's methodology is rooted in relative strength.

“Relative strength investing involves buying securities that have appreciated in price more than the other securities in their investment universe and holding those securities until they exhibit sell signals,” according to AdvisorShares. “In implementing DWSH’s shorting strategy to its core philosophy of relative strength investing, Dorsey Wright identifies and short sells those securities with the highest relative weakness within an investment universe primarily comprised of large-capitalization U.S.-traded equities.”

What's Next

Nearly two-thirds of DWSH's short positions are mid caps, a solid idea at a time when the S&P MidCap 400 Index is sporting a fourth-quarter loss of almost 23 percent.

The fund is also profiting from the erosion in cyclical sectors. Short bets on consumer discretionary names represent 28.64 percent of DWSH's portfolio while the industrial and financial services sectors combine for over 31 percent of the fund's weight.

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