Should You Be Shorting the Dow and S&P 500?

NEW YORK (TheStreet) -- Volatility in the markets has been amazing this Summer: the Greek debt drama; Puerto Rico loan default issues; the apparent bursting of the Chinese stock market "bubble"; general market participant fears of the U.S. Federal Reserve increasing interest rates; and the continued worldwide geopolitical tensions. Several days this week, in the U.S., we've woken multiple days to find European markets selling off and triple digit losses showing on the Dow Jones Index futures.

So, is there a way to capitalize off of the market volatility and still remain tilted towards the dividend growth investor style of investing? If you don't trade options or other derivatives, what alternatives are there for you to consider taking advantage of to potentially make money off of this market volatility and trend of the Dow's descent?

Your answer might be to consider the ProShares Short Dow30  (DOG).

ProShares Short Dow30 can be bought and sold just like most stocks, whether during regular market hours or pre/post regular market hours. You do not need to have a margin or any other type of special account to buy and sell it, as a regular brokerage account should suffice. 

In the most basic of terms, the ProShares Short Dow30 fund seeks daily investment results, before fees and expenses, that correspond to the inverse (the opposite) of the daily performance of the Dow Jones Industrial Average. If you are long ProShares Short Dow30, you are in essence, shorting and likely profiting from declines in the Dow.

For example, as of the writing of this article, the Dow was down 267.54 points or 1.54%. This is positive news for ProShares Short Dow30 holders, which, at the same time, was up 1.5%. Now, please don't construe this situation to always be the case. The inversion is not always a 1:1 opposite ratio and can vary widely depending on numerous variables, most notably, the overall market participant sentiment.

So, if you believe that the Dow will be heading lower, you might consider buying and holding ProShares Short Dow30 as a way to mitigate losses elsewhere in your portfolio. 

But, what about the S&P 500 Index?

You're in luck, because ProShares UltraShort S&P500 (SDS)is to the S&P 500 Index, what ProShares Short Dow30 is to the Dow. However, there is an important distinction with ProShares UltraShort S&P500.

The ProShares UltraShort S&P500 fund seeks daily investment results, before fees and expenses, that correspond to 200% the inverse of the daily performance of the S&P 500 Index. "Ultra" Short equates to a 2:1 inversion ratio, so you're essentially placing twice as much faith or money at stake, that the S&P 500 Index will falter. Is the 2:1 inversion ratio always a perfect 2:1? No. For example, as of the writing of this article, the S&P 500 Index is down 1.25%, but ProShares UltraShort S&P500 is up 2.6%. Close, but not exactly 2:1 -- and some days, it's far from 2:1.

These two securities can be just as much or more volatile than other securities in the general markets, so they may require close monitoring and management. However, if invested in properly, they may find a suitable role in your investment objectives.

This article is commentary by an independent contributor. At the time of publication, the author held a long position in DOG.

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