Do You Have A Systematic Process For Managing Inverse ETFs?

This morning I had to laugh when I saw an email that read, “Winter Is Coming – Owning Puts Is Not Enough.” Wall Street sells on fear and greed even when fear begins to abate like it is now. Most of this year has been about fear and not greed. That said, we just finished our Erlanger Research Monthly Article and the title of it was, “How To Trade Inverse ETFs As A Bear Market Matures”.

Over the last two weeks, several Financial Advisor clients have asked me if they should stay with their Inverse ETFs? I replied what was their process for exiting these instruments. The answer was typically, “Well, when the market starts to improve”. In other words, there was no process.

This led me to conclude that they needed a guide to help them figure out when to sell these type of ETFs, like as an example Proshares Short S&P 500 ETF (SH). Assume that you bought SH on August 29th at 15.42 which is where one got concerned about the drop from the peak. The S&P 500 had sold off by -6.30% from its peak on August 16th.

From August 29th to the S&P 500 October low on the 13th, the S&P 500 fell -9.11%. SH made 9.27% during the same period. If one sold SH last Tuesday, the 25th, then the gain would have been 3.76%. Hardly, the gain of 9.27%.

Another great example is the actively managed Inverse ETF Advisor Shares Dorsey Wright Short ETF (DWSH). For the year, this it has made 17.10% since December 31st close while the S&P 500 has lost -18.71%. The peak return here was 30.66% on October 12th. Talk about a drawdown!

Since June 30, DWSH has lost -5.16% while the S&P 500 is up 2.38%. Not that bad a return but in the second half of the year the peak gain on DWSH was 6.02%.