If you are getting nervous about lofty stock markets, it's getting easier to make money betting they will fall.
Exchange-traded funds - index-tracking investments that trade on an exchange like a stock - have become a cheap and easy way to bet on rising markets.
But there is now an explosion of ETFs that will short indexes, and even offer double the inverse daily returns.
U.S.-based ProShares Advisors LLC launched two ETFs on the American Stock Exchange yesterday aimed at profiting from a downturn in the Chinese and Japanese markets. Respectively, they short the FTSE/Xinhua China 25 Index and the MSCI Japan Index. "There is a lot of sentiment out there that China is in a middle of a stock market bubble," ProShares chief executive officer Michael Sapir said in an interview.
There has also been demand from investors for an ETF able to hedge an investment portfolio with China exposure, Mr. Sapir added.
The demand for shorting the Chinese market was evident yesterday as more than 500 million units traded in that ETF, Mr. Sapir said "It's the most amount of trading volume for the first day of any ETF that we have launched."
ProShares now has 35 ETFs out of 58 that offer short exposure. The latest two offerings also belong to its group of so-called "ultrashort" funds that are designed to deliver two times (200 per cent) the inverse daily performance of their underlying indexes before fees.
If the FTSE/Xinhua China 25 falls by 1 per cent in a day, the ProShares UltraShort FTSE/Xinhua China 25 (FXP - AMEX) should climb by 2 per cent. If the benchmark rises 1 per cent, the ETF should fall by 2 per cent.
This week, Maryland-based Rydex Investments also launched three ETFs on the AMEX that will short the Standard & Poors' 500-stock index, S&P MidCap 400 Index and Russell 2000 Index of small companies, and offer double the return. Rydex funds charge fees of 0.7 per cent of assets a year, compared with a 0.95-per-cent charge for ProFund's ETFs.
Tim Meyer, a business manager with Rydex Investments, said the company has also filed prospectuses for some 20 other ETFs that would short everything from industry sectors to indexes focused on investment styles.
Rydex's move into ETFs offering short exposure is simply an extension of its line of 10 mutual funds that use a similar strategy, he said.
Since January, Toronto-based Betapro Management Inc. has been offering four "bear" ETFs that will also give twice the inverse daily performance of an index. They include the Horizons BetaPro S&P/TSX 60 Bear Plus ETF and others that short a global gold index and the Canadian financial and energy sectors.
Howard Atkinson, president of Horizons BetaPro ETFs, said that two-thirds of the $550-million in assets in its eight ETFs are in the bearish ones. The Horizons BetaPro S&P/TSX 60 Bear Plus is the second mostly actively traded ETF in Canada, he said.
"The bears are popular because there is not a lot of alternatives to using our bear products," Mr. Atkinson said. Retail investors, for example, can achieve short exposure without opening a margin account.
Mr. Atkinson said his firm has not filed prospectuses for more bear ETFs, but expects that futures ones will focus on resource stock sectors and commodities.
"When money managers talk to us about what they would like to see from us, they keep asking for those types of products," he added.
Dan Hallett, a Windsor, Ont.-based independent fund analyst, said the ETFs offering short exposure can be appealing after a lot of years of rising markets, but warns that they are not for the novice.
"It's more for knowledgeable or sophisticated investors," Mr. Hallett said. "They can be fine for a short term bet, but that is the most dangerous way for people to invest. If you are wrong, you can be two times wrong."
A Selection of EFTs that go short
|ETF||Symbol*||Price||Volume||Low Price||52-week high||One-month price change||Three-month price change||Year-to-date price change|
|HBP Energy Bear+ E.T.F.||HED-T||$21.00||35,820||$20.22||$27.32||- 8.7%||- 10.6%|
|HBP Financials Bear+ E.T.F.||HFD-T||$21.29||30,875||$20.37||$24.24||10.40%||1.60%|
|HBP Global Gold Bear+ E.T.F.||HGD-T||$13.11||306,234||$12.54||$24.24||- 13.3%||- 31.3%|
|HBP 60 Bear+ E.T.F.||HXD-T||$19.63||2,907,630||$18.98||$25.83||0.80%||- 9.4%|
|ProSh Short QQQ E.T.F.||PSQ-A||$51.66||98,900||$49.23||$65.50||- 0.7%||- 10.2%||- 17.9%|
|ProSh Short S&P500 E.T.F.||SH-A||$60.59||226,020||$59.01||$65.78||5.40%||- 1.1%||- 2.7%|
|ProSh Short Rus2000 E.T.F.||RWM-A||$71.62||22,700||$70.05||$75.90||9.00%||- 0.8%|
|ProSh UltShr Rus2000 E.T.F.||TWM-A||$69.75||7,335,517||$67.08||$79.87||16.80%||- 4.0%|
|ProSh Short Emerg Mkt E.T.F.||EUM-A||$73.10||25,000||$71.10||$73.44|
|ProSh UltShr MSCI EAFE E.T.F.||EFU-A||$70.63||122,800||$68.60||$71.00|
* Shares traded on American Stock Exchange are in $U.S.
More than 500,000 units of ProShares UltraShort FTSE/Xinhua China 25 traded on Thursday. Incorrect volume information was published yesterday.