Setting the tone..
We live in a time of unprecedented uncertainty. Global markets have turned volatile in light of the unknown. We don't know what the future holds, but with the right amount of pre-preparation and well executed moves, we can ensure we can profit from it. How exactly? Lets learn!
Not Your Average Exchange Traded Fund:
ETFs are a financial instrument that allow you to gain exposure to an entire niche with a single purchase. Exchange traded funds are opportunities to buy into securities from an entire sector. There is an inherent value to diversification across many companies rather than just one. Therefore, these index funds are powerful tools for long term passive investing, and many investors will solely purchase cheap index funds with moderate dividends.
This approach to investing is great in one circumstance: the market is going up. We've talked about it before, but these are the funds you want to average into if you're taking a long term passive income approach. However, when the market is going into a clear downtrend, these are not necessarily the pick that will make you short term capital gains.
Inverse/bearish ETFs are products that will go up in value when the asset is is inversely correlated to goes down. These products are an opportunity to buy into appreciating assets while the rest of your portfolio depreciates in dollar value. This is one way to hedge your portfolio, but its important to note: THESE INVERSE ETFs ARE NOT SUITABLE FOR LONG TERM INVESTMENT.
Fuel To The Fire:
Another aspect which makes these products confer a high risk is their extreme volatility. Leverage amplifies the effective buying power than an individual happens, and these inverse products are commonly leveraged 1.5-3x. The leverage will increase the volatility of the product directly, but the market interest also influences price.
Example: Lets say you are trading an inverse ETF product that tracks the S&P 500 with 2x leverage. If the market takes a 5% nose dive, you can hypothetically expect a 10% increase in the price of the inverse product.
In reality, you might see something akin to 15 or 20% increase. This is because of supply-demand paradigm among the market members. If demand for this product is high, and supply is low, then the price of the asset will exceed the value (which is defined by 2x inverse leverage).
This example shows that while you can estimate the prospective gain of an inverse product, you cannot forecast it with 100% certainty. As always with trading, there are external factors which can influence the trade.
How these products work is something that most don't really understand. There is a tendency for new traders to buy "whatever is going up" without fully understanding what they are buying. When you are buying an inverse product, you are not buying a stock. There is no company here. This is purely a financial instrument that tracks relative directional volatility. During periods of consolidation or lack of direction, these products will not have a high demand - and therefore, lower volatility.
Expanding your understanding:
Hopefully you understand the basics: leveraged volatility instruments exists so people can hedge their portfolio, and capitalize on the market having a clear direction. You can buy 3x bearish products as well as 3x bullish products. There is a wide variety of different instruments you can buy depending on your market perception, sector expertise and tolerance for risk.
We've been talking about strictly products that match "the market", ie: S&P 500, but there are products for almost every sector. We're going to talk about some of the different products available, and which side of the correlation we are looking to capitalize on within the context of the global market..
But first.. I wanted to hype up our YouTube! There is content uploaded on a regular basis that you will find valuable. Global markets, crypto analysis, and everything inbetween. The Performante Youtube should be one of your resources to understand the market.
1. Gold ETFs:
Bullish: JNUG, NUGT, UGLD, ..
Bearish: DGLD, GLL, DUST, ..
Gold is a commodity with limited quantitiy. Since the start of time we have used it to store value for use at a latter date. As hyperinflation continues, the prospective value of gold could increase. This would mean we are looking at the long ETFs as conditions warrant.
2. Silver ETFs:
Bullish: USLV, ..
Bearish: ZSL, DSLV, ..
There are much less options for the little brother commodity. This asset has recently taken a bearish turn, but ~$12 looks to be a firm support for silver.
3. Oil ETFs:
Bullish: GUSH, UWT, ..
Bearish: NRGD, YGRN, DWT..
OPEC agreement fell though earlier this year, and since that day, this sector has been absolute anarchy. Many countries are producing oil at a fiscal loss at an attempt to undercut and stimulate production. There is a massive long opportunity between oil/natural gas in the coming month, but we haven't seen the criteria to warrant action at this point in time.
If you want to learn more about our market perception, consider Performante Premium! This education platform provides all the materials you need to be successful and effective in the market, and direct one on one help from our team. This service includes access to our market analysis and trades.
4. Index Funds
Bullish: SPXL, TQQ, UPRO, ..
Bearish: TVIX, HUV, ..
This niche of inverse products that are correlated to the stock market are our personal favorites. However, these products are very popular among the rest of the market and so it is very easy for them to become overvalued.
When considering a short term bearish play, we want to avoid overvalued ETFs. These instruments are likely overvalued because of recent bearish momentum.. AKA: you're too late to the party. In order for the products to be massively profitable, you must use foresight and have a strict plan for entry.
Falling victim to fomo and entering long on these inverse ETFs without rhyme or reason is a situation for diaster. The reason is simple! If the market is going down hard, these go up faster. If the market starts to reverse based on news conference, fundamentals, etc.. then you will see the inverse products shed value even faster then how they gained it.
Another factor to consider is the platform you trade on, and what instruments are available to trade. Not every exchange will have the products listed above, but they will likely have equivalent options. Don't sweat trading the exact same options, just consider the correlation/leverage/instrument that fits your tolerance for risk and trading plan.
I said it earlier and I'll say it again: you do not want to hold onto inverse products for long periods of time. Identify opportunity. Manage risk. Develop a plan. Execute: buy, sell, rinse, repeat.
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