For those who prefer to hedge via short selling, they can buy into a short ETF which does the short selling, and is designed to invert the return on an index (for example, if the index is down by 10%, the fund is up by 10%). The most popular short ETFs (also called bear ETFs or inverse ETFs) track benchmarks linked to hot tech stocks, and seek to deliver positive returns that are a multiple of any decline in those benchmarks, Barron's reports. Meanwhile, there are just 4 actively managed short ETFs that use more sophisticated approaches to do better than simply inverting the return on an index, Barron's adds. These are listed in the table below.
A New Way To Bet Against The Market
|AdvisorShares Dorsey Wright Short ETF||DWSH|
|AdvisorShares Ranger Equity Bear ETF||HDGE|
|Virtus Enhanced Short U.S. Equity ETF||VESH|
|WisdomTree Dynamic Bearish U.S. Equity ETF||DYB|
What Matters for InvestorsThese actively managed short ETFs represent another potentially valuable tool that investors can use to protect their equity portfolios against the next market crash. They all take slightly different approaches, and thus have had divergent results in the current bull market. (For more, see also: Top 4 Inverse ETFs for a Bear Market.)
"There's a long history of academic research showing that weak momentum stocks tend to dramatically underperform the market over time," as John Lewis, senior portfolio manager at Nasdaq Dorsey Wright, told Barron's. As a result, the Dorsey Wright ETF essentially is the opposite of a momentum-driven fund that takes long positions in the stocks that show the strongest momentum, or upward price movement relative to the market as a whole. This fund was launched in July, and the table below summarizes the key methodologies employed by its managers.
How One ETF Shorts The Market
|AdvisorShares Dorsey Wright Short ETF (DWSH)|
|Proprietary system ranks stocks based on relative strength or weakness vs. the market|
|Shorts the 80 to 100 weakest large cap and mid cap stocks, per its ranking system|
|Updates its portfolio weekly, based on the latest results of the ranking system|
The Virtus ETF also uses quantitative formulas, in part. Half its portfolio shorts the five sectors that showed the weakest performance in the last nine months. The other half consists of short futures contracts on the S&P 500 Index (SPX).
The Ranger ETF's managers perform fundamental analyses of companies' financial reports to uncover cases of creative accounting, such as "pulling forward their revenue," to mask underlying weaknesses, then short these stocks. The Ranger ETF was launched in January 2011, and it has delivered gains in 5 of 6 subsequent down periods for the S&P 500 that were considerably more than the inverse of the percentage losses for the index, per Barron's.
By not using leverage, the Ranger ETF has managed to keep its average annualized loss over the past five years to 12.5%, during which time the S&P 500 gained an average annualized 13.5%. A short hedge fund run by the same managers was up by 80% net of fees in 2008, without using leverage or derivatives, while the S&P 500 fell by 37%, Barron's adds.
The Wisdom Tree ETF uses various fundamental analyses of the market as a whole to determine whether it should take a bullish, neutral or bearish stance. When bullish, the fund has long positions in 100 stocks that are screened based on growth and valuation metrics, but it hedges 75% of the portfolio with short sales of S&P 500 futures. When neutral, it hedges 100% of the portfolio. When bearish, it holds only U.S. Treasury bonds and short S&P 500 futures.
Right now Wisdom Tree is bullish, and has been bearish only three times since its inception at the end of Dec. 2015, per Barron's. From inception through Sept. 2018, the ETF delivered a cumulative total return of 8.3%, without a down year yet, per Morningstar, compared to 50.8% for the S&P 500.