Inverse Investing Made Easy

When buying equities the game has a simple philosophy: Buy Low, Sell High.

That’s all fine and dandy if you believe prices are going higher. What happens if you wish to invest and you feel the market is overvalued? In the past if you wanted to bet against the rising market your only choice was to buy or sell options. Options can be extremely risky and they require that you have good market timing. Another problem with options is you can’t buy them with retirement accounts.

I’ve been a part of several 401K retirement plans in my working career. Never have I seen an option to invest in a bear or contra fund. Bear market funds make money when the market goes down. They tend to lose money when the market goes up. An example of a bear market fund is the Prudent Bear Fund.

After I left my last job, I had my 401K rolled over to a self-directed retirement account with Ameritrade. From this account I can invest in far more funds than any employer ever gave me an option to. I can also invest in regular stocks. Mutual funds like Prudent Bear will always have a minimum investment and redemption fees. Individual stocks don’t have redemption fees and the minimum investment for a stock is always the price of a single share of stock.

This year a new investment option became available. A company called ProShares released a bunch of ETFs (Exchange Traded Funds) on the major indexes. Index based ETFs are nothing new. What ProShares offered that was new was inverse (or short) ETFs. Now the individual with no knowledge of options can bet against an overvalued market from their retirement account without a minimum investment or redemption fee. ProShares handles the complexities of options and timing expirations. They even offer Ultra ETFs which doubles the movement made by a standard ETF.

Here is an example of how the ProShares NASDAQ based ETFs behaved on Friday when the NASDAQ 100 (QQQQ) dropped 0.86% percent.

ProShares Short QQQ      (PSQ) +1.03%
ProShares UltraShort QQQ (QID) +2.01% 
ProShares Ultra QQQ      (QLD) -1.42%

The ProShares Ultra ETFs are a good option for the regular investor who wishes to bet on the direction of the market. Professional investors might find the low volume of trades too illiquid for their liking.

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MAS

Critical MAS is the blog for Michael Allen Smith of Seattle, Washington. My interests include traditional food, fitness, economics, and web development.