As others sound the alarm about the economy’s potential plunge into a recession, investors may turn to reverse or bearish exchange-traded fund strategies to hedge other risks.
After the Federal Reserve executed a 75 basis point interest rate hike in response to soaring inflation with more expectations to come, more observers are warning of a potential fall headed for a recession, and many doubt the selloff in the equity market will subside without a clear turn in the inflation data, Reuters reported.
“Volatility is going to stay high, making market participants, myself included, less interested in taking risk in general,” Steve Bartolini, bond fund manager at T. Rowe Price, told Reuters.
According to data from Bespoke Investment Group, a recession could spell more pain for equity markets, as bear markets with recessions are typically longer and steeper, with a median decline of around 35%. The S&P 500 is already in a bear market after falling 22.2% year-to-date.
“If we do get into a recession later this year or early next year, earnings would decline on equities and stocks would likely fall further,” Sean McGould, chairman and co-chief investment officer, told Reuters. hedge fund firm Lighthouse Investment Partners. .
Recession fears stem from investor doubts about how the Fed is handling inflationary pressures, as many believe policymakers are only now trying to catch up. Consequently, Fed actions could become overzealous in tightening monetary policies and dragging the economy into a recession.
“The Fed is in a very difficult position that it has frankly put itself in by mismanaging monetary policy and letting inflation rise as much as it has,” chief investment officer Michael Rosen told Reuters. at Angeles Investment Advisors. “The so-called soft landing seems increasingly tenuous.”
ETF traders looking to protect their portfolios against potential downsides ahead may consider some exposure to bearish or inverted ETFs to protect against further declines.
For example, the ProShares Short S&P500 (NYSEArca:SH) takes a simple inverse or -100% daily performance of the S&P 500 Index. Alternatively, for the more aggressive trader, leveraged options include the ProShares UltraShort S&P500 ETF (NYSEArca: SDS), which tries to reflect -2x or -200% of the daily performance of the S&P 500; the Direxion Daily S&P 500 Bear 3x Shares (NYSEArca: SPXS), which takes -3x or -300% of the daily performance of the S&P 500; and the ProShares UltraPro Short S&P 500 ETF (NYSEArca: SPXU)which also takes -300% from the daily performance of the S&P 500.
Those who want to hedge against the risk of the Dow Jones Industrial Average can use inverse ETFs to add to their long stock positions. The ProShares Short Dow 30 ETF (NYSEArca: DOG) tries to reflect -100% of the daily performance of the Dow Jones Industrial Average. For more aggressive traders, the ProShares UltraShort Dow 30 ETF (NYSEArca: DXD) takes the -200% of the Dow Jones, and the ProShares UltraPro Short Dow 30 (NYSEArca: SDOW) reflects the -300% of the Dow Jones.
Finally, investors can also hedge against a decline in the Nasdaq with bearish options. For example, the ProShares Short QQQ ETF (NYSEArca:PSQ) takes the inverse or -100% of the daily performance of the Nasdaq-100 index. For the aggressive trader, the ProShares UltraShort QQQ ETF (NYSEArca: QID) follows the double inverse or -200% performance of the Nasdaq-100, and the ProShares UltraPro Short QQQ ETF (NasdaqGM: SQQQ) reflects the triple inverse or -300% of the Nasdaq-100.
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