inverse

Inverse Equity Hedge

for stocks

A comparatively low-cost way of shorting the entire S&P 500 or other stock index is with an Inverse Equities ETF. These exchange-traded funds appreciate when the price of specific stock indexes falls in value.

ETF Trends reports, "Used appropriately, even a small allocation of your capital could help make up for any losses you sustain in a market crash."


Suitability:

most investors

Most Investors

Inverse Equities ETFs are suitable for most investors since they are bought and sold like stock.

Protection:

low

Low

Protection is minimal since it requires a 50/50 long/short allocation for full protection.

Cost:

low to moderate

Low to Moderate

Hovering around $20 a share, these funds represent a low-cost means of shorting entire indexes.


Example:

The 2008 market crash shows that the S&P 500 declined 37%, and volatility reached 41%. Investors using diversification to control risk lost significant amounts of money during that period. Those that hedged their large-cap investments with an Inverse ETF could have reduced losses and improved volatility.

Below are the improvements with a 10% hedge where volatility was improved by 7%. Likewise, a 20% hedge would have nearly doubled the benefit. Returns enhanced by almost 13%, while volatility shrank by close to 17%.

2008 Return Annualized Volatility
S&P 500 -37.00% 40.96%
S&P 500 with 10% Hedge in ETF (-1x ETF) -30.02% 30.91%
S&P 500 with 20% Hedge in ETF (-1x ETF) -24.21% 23.73%

Resources:



© 2020 Todd Moses

The strategies discussed are for illustrative and educational purposes and are not a recommendation, offer, or solicitation to buy or sell any currency or to adopt any investment strategy. There is no guarantee that any strategies discussed will be useful. Todd Moses is not a licensed securities dealer, broker, or US investment adviser or investment bank.