Are we setting up for a bearish year despite the high expectations that investors brought into 2014? A large correction is what traders and investors fear after the Dow Jones Industrial Average and S&P 500 Index dropped 3.5 percent and 2.6 percent, respectively, last week. Last week marked the Dow’s worst trading week since November 2011 and the S&P’s biggest weekly drop since June 2012. Caterpillar’s (NYSE:CAT) announcement on Monday that its fourth-quarter profit rose 44 percent helped push the markets back into positive territory, but the market quickly turned south.
That is not good. It shows investors are losing faith in a market that has been pumped up by an overly accommodative Federal Reserve. Market sentiment is worsening, and while this isn’t a 2008 situation, it’s definitely shaping up to be a potential large correction. To take some protective action, traders may want to put on some bearish positions. Those who are bearish could consider selling stock, selling covered calls on their positions, shorting stocks or buying puts. While each of these approaches has its respective benefits and risks, in this article I want to highlight several funds that could provide great short-term returns in the event of a market sell-off. These types of funds performed terribly in 2012 and in 2013, as the market saw up-day after up-day, as well as record low volatility.
Direxion Daily S&P 500 Bear 3x ETF (NYSEARCA:SPXS): The fund can be considered for heavily leveraged bearish exposure to large-cap stocks. The Direxion Daily S&P 500 Bear 3x ETF, formerly the Direxion Daily Large Cap Bear 3X fund, seeks daily investment results before fees and expenses of 300 percent of the inverse of the price performance of the S&P 500 Index. As with other funds, there is no guarantee the fund will meet its stated investment objective, and it is subject to slippage as described above. The fund also has a higher 1.14 percent annual expense ratio.
The Direxion Daily S&P 500 Bear 3x ETF management team likes to create short positions by investing at least 80 percent of its net assets in futures contracts; options on securities, indexes, and futures contracts; equity caps, collars, and floors; swap agreements; forward contracts; short positions; reverse repurchase agreements; ETFs; and other financial instruments that, in combination, provide leveraged and unleveraged exposure to the S&P 500. Given this approach, in times of market sell-offs, the Direxion Daily S&P 500 Bear 3x ETF will deliver outsized returns.
Thus, this fund should be considered by those who seek to profit from panic that could result from a fast sell-off that jolts the market. The Direxion Daily S&P 500 Bear 3x ETF currently trades at $36.80 per share. The Direxion Daily S&P 500 Bear 3x ETF has average daily volume of 1.29 million shares exchanging hands. SPXS has a 52-week trading range of $32.96-$73.10.
Direxion Daily Small Cap Bear 3X Shares (NYSE:TZA): The Direxion Daily Small Cap Bear 3X ETF management seeks daily investment results of 300 percent of the inverse of the price performance of the Russell 2000 Index that tracks small cap stocks. It includes approximately 2,000 of the smallest securities based on a combination of their market cap and current index membership. TZA actually does not invest in equity securities or stocks. What The Direxion Daily Small Cap Bear 3X ETF does is creates short positions by investing at least 80 percent of its net assets in financial instruments to provide leveraged and unleveraged exposure to the small-cap index and the remainder in money market instruments.
The Direxion Daily Small Cap Bear 3X ETF also recently underwent a reverse split in response to the bull market powering ever higher. It now currently trades at $18.50 per share on average daily volume of 11 million shares. The Direxion Daily Small Cap Bear 3X ETF has a 52-week range of $16.02-$45.80.
Market sentiment is worsening, but we don’t need to dump positions all at once here. A large correction could be brewing and there is evidence that it is more likely. To capitalize on a broader market sell-off, I recommend these two bearish funds that do incredibly well during corrections.
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