If you think the market-or a sector of it-is headed for a dip, there's now a cost-effective way to bet on your hunch. A new family of exchange-traded funds from ProShare Advisors seeks to deliver profit during falling markets. "These ETFs look to produce returns that are the opposite of the underlying index," explains Michael Sapir, CEO of ProShare Advisors, part of ProFunds Group. When, for example, an index such as the Nasdaq 100 falls 1 percent, the corresponding ETF should gain 1 percent before fees.
Launched in June, the four short ProShare ETFs-Short QQQ, Short S&P 500, Short Dow 30 and Short Midcap 400-were well-received. Why the warm reception? For conservative investors, these inverse ETFs offer a way to hedge against market dips without the complexity and risk level involved in shorting individual stocks or the fees associated with short mutual funds. "For example, you might own a lot of technology stocks that you believe in long-term but have concerns about what will happen with technology stocks in the short term," says Sapir. "Rather than sell stocks and incur transaction fees and taxes on gains, an investor can use our short Nasdaq fund (Short QQQ) as a hedge against a tech sector dip."
More aggressive investors can use the inverse ETFs to pursue profits rather than minimize risks, adds Sapir. "Now you can look for opportunities when you believe a part of the market will perform poorly in the short term-not just when they will do well."