This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

ETFs to Make You Rich During a Market Crash

NEW YORK (TheStreet) -- A falling market doesn't have to mean a falling portfolio value. Hedge funds were designed to hedge, or have longs and shorts in order to be market neutral. Not everyone has the desire or the ability to short stocks but that doesn't necessarily relegate your portfolio to second-tier status.

I was recently asked how someone with a self-directed Individual Retirement Account can short the market. Futures make an ideal vehicle to profit from a declining market by short futures contracts, something even an IRA account is allowed to do. But he isn't set up for futures and doesn't know the first thing about them, much less effectively execute a winning strategy.

Wall Street created a solution for investors who want to hedge against or even profit during a falling market and it's called inverse/short/bear exchange-traded funds. I often refer to the SPDR S&P 500 ETF (SPY) as a reference and usually trade oil through the United States Oil Fund (USO) ETF. Both of these commonly traded ETFs allow investors to synthetically trade futures contracts in an equity account. In other words, ETFs trade on stock exchanges, but they're designed to mimic futures and or options on futures.

Inverse ETFs are the same in concept albeit instead of creating a long position they create the opposite or a short position. Best of all, they allow a short bias while capping risk to the cost of the ETF. When the market falls and other stocks are declining, inverse ETFs rise in value.

There is a significant downside to trading ETFs to which investors should pay particular attention and the cost of carrying it. ETFs and especially inverse or leveraged ETFs decay similar to options. The decay is generated from underlying transaction costs and management fees to operate any given ETF. Some, including the SPDR S&P 500, have relatively low costs, allowing for a buy and hold strategy. But others are more trading vehicles than investments.

SPXS Chart

The Direxion Daily Large Cap Bear 3X Shares (SPXS) makes an effective vehicle to short the market on any given day, but don't hold it for weeks or longer. If you do, the decay akin to an option may lose value, even if the market drops.

1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
SPXS $16.22 -0.12%
SH $20.54 -0.02%
PSQ $51.54 -0.08%
AAPL $118.03 -0.71%
FB $105.41 -0.31%


Chart of I:DJI
DOW 17,813.39 +1.20 0.01%
S&P 500 2,088.87 -0.27 -0.01%
NASDAQ 5,116.1430 +13.3350 0.26%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs