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TheStreet Open House

Why You Should Consider Short ETFs For Your Portfolio

NEW YORK ( Fabian Capital Management) -- With the stock market very near its recent highs and the bull market having moved into a mature phase, many investors are probably considering a defensive game plan in case we enter into a protracted decline.

With that in mind, there are several different options you have at your disposal to shelter your portfolio from the pernicious effects of stock market volatility.

You could move your portfolio to cash or short-duration bond funds to ride out the storm or, if you're more aggressive, you could use options to hedge your bets on a highly appreciated stock position.

But the strategy I want to focus on is putting a portion of your portfolio into a short ETF or mutual fund that moves inverse to a specific index.

Strategies and Opportunities

The top reason why an investor would consider a short ETF is to profit when the market is falling. The ability to instantly add a hedge to your portfolio through the use of a single-beta short ETF such as the ProShares Short S&P 500 (SH) is why I love the flexibility of exchange-traded funds. Virtually every investor with a brokerage account (even an IRA) has the ability to access this strategy with just a few clicks of their mouse.

However, implementing it successfully and coming out on the other side a winner is a whole different animal.

My first tip for the use of these inverse funds is to implement them in moderation as a hedge against existing equity or fixed-income positions. This enables you to smooth out the price fluctuations in your accounts so you don't have to withstand the volatility of a steep decline.

But it should be noted that these funds are best used as short-term trading positions rather than long-term investment themes. Remember: The stock market is generally wired to move in an upward direction, which is why when you short the market, you run the risk of getting caught in a swift rally. By having small allocations, a short-term time horizon and using a risk management mind-set, you are more likely to have a positive experience when using these specialized ETFs.

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