Three ETFs for the Panicked Investor (SH, SEF, HDGE)

The average retail investor gets their news from the television and internet along with most Americans. Unfortunately a large portion of the same investors will rely on the news when making their investment decisions.

The problem here is that the news you are watching or reading about is just that, “old news”. This news has already been priced into the stock market and trading on old news will only hinder any strategy to make money.

In recent years and in particular the last two weeks, the news has been overwhelmingly negative regarding the government and economy. Naturally one would assume that would relate to a stocks market in that is also failing. What investors need to realize is that there is a major disconnect between the news and the stock market. An investor that has invested based on headlines the last few years would have missed out on a great bull market.

With all that being said, investors must also sleep at night. And there are bubbles that burst all the time on Wall Street. So if protecting the investment portfolio is the strategy, there are a few ETFs that can help.

ProShares Short S&P 500 ETF SH

The ETF seeks a return that is the exact inverse of the S&P 500 for a single day. For example, if the S&P 500 is down 1.5 percent on the day, theoretically SH should be up 1.5 percent and vice versa. Because the ETF is reset each day, over time compounding will alter the results of SH versus the S&P 500. The ETF is a short-term instrument that can be used to protect a portfolio against a drop in the overall U.S. stock market.

AdvisorShares Ranger Equity Bear ETF HDGE

The objective of the ETF is to create capital appreciation by shorting domestically traded stocks. The team searches for stocks with low earnings qualities and aggressive accounting. By being short the market, the ETF in theory should do well in during any market sell-off. From 9/18 to 10/8 the SPDR S&P 500 ETF SPY fell by 4.4 percent. During the same time, HDGE increased in value by 3.4 percent. Similar to SH, this ETF is typically a short-term play based on the fact the market is in a bull market. That is unless the goal is to have some insurance on a portfolio; in the case HDGE could be a longer-term play.

ProShares Short Financials ETF SEF

Similar to SH, this ETF will return the one-day inverse of the underlying index, which happens to be the Dow Jones U.S. Financials Index. During most market pullbacks the financials will fall with the overall market. Recently the financials have often been the leaders of the selling and therefore SEF could provide protection to a portfolio that has not only market exposure, but also above-average exposure to the financial sector.

One important factor to always realize with short ETFs is that the long-term trend in the U.S. stock market has been up. Attempting to time the market for a sell-off is not easy and using short ETFs could end up hurting a portfolios performance more than helping. Proceed with caution.