Special Report: 4 Ways to Capitalize on a Chaotic Market

You probably know of several ways to profit from declines in the stock market, like short selling and put options.

You can also find a stallion of stock, one that is able to weather the market volatility and come out stronger at the end of it.

Those are far and few between, but Luke Burgess has been clueing in his members of The Crow's Nest about a stock he’s deemed the “Tesla Killer,”  but in this report, we’re looking at an easier way to bet against the big indexes: inverse exchange-traded funds (ETFs). (OK, after we give you the four ways to profit from market volatility, we’ll let you in on Luke's latest recommendation as well).

What Are Inverse ETFs and Why Are They a Good Alternative to Shorts and Puts?

Like regular ETFs, inverse ETFs are publicly traded “baskets” of financial instruments whose performance is tied to some kind of index.

But while regular ETFs use stocks, bonds and options to move in the same direction as their underlying index, inverse ETFs use swaps, derivatives and other complex instruments to move in the opposite direction from their underlying index.

As you can see below, the price chart of the ProShares S&P 500 Short ETF (NYSE: SH) “mirrors” that of an S&P 500 ETF over brief timespans.  

spy vs proshares chart

Inverse ETFs can help investors avoid some of the risks associated with other short strategies - and circumvent the restrictions on those strategies.

For example, short selling - the practice of borrowing and selling shares you don’t own, with the intention of later purchasing them at a lower price and returning them to the lender - is not allowed in individual retirement accounts (IRAs). It’s also prohibited by many brokerage account providers, including Robinhood.

Part of the reason for this is the inherent riskiness of short selling for individual investors. A person who makes a bad short sale - one in which the shorted stock increases in price after selling - may find that they can’t afford to repurchase the stock at its new, higher price.

If the stock continues to rise, their losses may compound indefinitely, and can exceed 100% if the price more than doubles. They may also face rising penalties from the lender for failing to return the borrowed shares.

Some short option strategies, like naked call selling, come with a similar risk of unlimited losses. As a result, many IRA and brokerage account providers also restrict option trading to investors who have received special approval and maintain large minimum balances.  

Inverse ETFs, on the other hand, are traded just like stocks. Investors don’t need to jump through any hoops to buy or sell them, and the worst-case scenario for an inverse ETF trade is loss of principal.

That said, there are some things to keep in mind about these useful funds…

How To Use Inverse ETFs

It’s worth noting that inverse ETFs are not “buy and hold” investments. Over a long enough timespan, many equity indexes will rise by 100% or more - and over such a timespan, an inverse ETF tracking that index will either go to zero or diverge from the index’s performance.

The S&P 500 has roughly doubled over the last five years. As you can see below, the aforementioned ProShares inverse ETF has lost most of its value over that time, but hasn’t quite “mirrored” the gain of the S&P 500 perfectly.

SPY vs Pro Shares Inverse

In fact, many inverse ETFs are designed with a one-day holding period in mind. They typically rebalance their holdings at the end of each trading day - offloading the day’s swaps and derivatives, and then buying different ones to prepare for the next day’s market movements.

Over the long term, this internal inconsistency leads to the kind of divergence shown above.  

Inverse ETFs can be held for multiple days in a row - but as we’ve discussed, the shorter the holding period, the better. They often become unreliable if held for more than a month.

Below, we’re taking a closer look at four inverse ETFs which can help you profit from market declines over a period of hours, days or weeks. The first may sound familiar to you…

ProShares Short S&P 500 ETF (NYSE: SH)

Expense ratio: 0.9%

Volume: 34,105,582

Year-to-date (YTD) return: 5.4%

Underlying index YTD return: -5.5%

Notes: The ProShares Short S&P 500 ETF uses swaps and bonds to produce the opposite of the daily return of the S&P 500 index, making it a useful tool for shorting U.S. large cap stocks.

It is one of the oldest, most popular, and most liquid inverse ETFs on the market, having traded since 2006.

Pro Shares Short S&P 500 ETF

ProShares Short Russell 2000 ETF (NYSE: RWM)

Expense ratio: 0.95%

Volume: 5,038,043

YTD return: 11.36%

Underlying index YTD return: -10.82%

ProShares Short Russell 2000 ETF

Notes: This inverse ETF is made up of swaps and bonds and tracks the opposite performance of the Russell 2000 Index, providing an easy way of betting against smaller and more volatile publicly-traded companies.

It is a similar age to the aforementioned short S&P 500 ETF, having traded since 2007. It has only a fraction of the volume, however. For now, enough shares are still changing hands each day to avoid liquidity problems - but investors should keep an eye on volume in choosing entry and exit points for this ETF.

ProShares Short QQQ ETF (NYSE: PSQ)

Expense ratio: 0.95%

Volume: 27,725,352

YTD return: 10.06%

Underlying index YTD return: -10.01%

ProShares Short QQQ ETF

Notes: This inverse ETF uses swaps and bonds to move opposite the Invesco QQQ Trust, which in turn tracks the Nasdaq-100 index. It’s one of the most popular ways to bet against the tech sector - and thus has been a lucrative trade during the most recent earnings season.

It’s just as old as ProShares short S&P 500 ETF, and has almost as much volume.

ProShares Short MSCI EAFE ETF (NYSE: EFZ)

Expense ratio: 0.95%

Volume: 76,337

YTD return: 3.3%

Underlying index YTD return: -3.3%

ProShares MSCI EAFE ETF

Notes: This ETF is made entirely of swaps and tracks the inverse performance of the Morgan Stanley Capital International Europe, Australasia and Far East (MSCI EAFE) index, a broad gauge of stock markets in developed countries other than the U.S. and Canada. It is thus useful for betting against international stocks.

Like the short Russell 2000 ETF, it has traded since 2007. It has the lowest volume of any ETF mentioned in this report - so investors should beware illiquidity when buying and selling.  

Don’t Bet Too Much Against The House

It’s worth mentioning again that betting against stocks is inherently riskier than betting on them. In moments of market turbulence like the present, it’s easy to lose sight of the fact that major stock indexes almost invariably rise over a long enough timespan.

But here at Outsider Club we understand the impulse to cash in on the chaos of the early 2020s. We believe that the inverse ETFs outlined in this report are safer and easier to use for most investors than short sales or options.

Ultimately, however, growing wealth is a function of time in the market - not timing the market. We hope this report has given you some useful short-term trading ideas which can supplement a well-designed, long-hold portfolio.  

A Horse You Can Bet On

If amidst the chaos, you begin to find yourself wanting to latch onto a company for stability instead of an inverse ETF, one small company has been profiting from the demise of Tesla.

It’s not some fund dedicated to inversing Tesla, either.


It is a small company that is challenging Tesla and the entire electric vehicle industry.

Jimmy even believes that Tesla may be on its deathbed.

Tesla’s share price has been dropping drastically in the last weeks, shedding hundreds of dollars.

Even Elon Musk announced at one point that he was selling 10% of his stake in the electric car giant.

Why?

Well maybe because electric cars are about to become a thing of the past…

Which might sound crazy considering that they’re relatively new.

But thanks to a new discovery — known as “Blue Gas” — companies that produce electric cars (like Tesla) are about to go down in flames.

See, “Blue Gas” is 100% emission free, can propel vehicles hundreds of miles, and allows cars to fully charge in just minutes.

So it should come as no surprise that projections for “Blue Gas” vehicles are sky high.

In fact, in the next few years, predictions have it that there will be more than 10 million “Blue Gas” vehicles on the road...

A statistic that prompted Bloomberg to project that “Blue Gas” will “skyrocket 1,000 times over.”

The thing is, “Blue Gas” is slated to go global soon.

And the tiny company driving the “Blue Gas” industry is primed to absolutely shatter any gains ever paid out by Tesla.

So there’s no time to wait for the market volatility to calm down because by that time it could be too late.


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