When the market tanks, these ETFs soar.
We're talking about ultra-short exchange traded funds. Investors fretting over the recent stock market selloff may want to take a look at this group of ETFs.
They work like any other ETF and act as open-ended mutual funds in that they can be traded at any time. The ultra-short twist is that they double-short whichever index they are attempting to replicate.
In February when the Dow Industrials Average fell 2.8% -- the worst month in nearly two years -- ProShares UltraShort Dow 30 ETF gained 7.3%.
Now with the Dow off nearly 6% from its July 19 record high, ultra-short ETFs are returning a pretty penny.
ProShares UltraShort Dow 30 ETF is up 12.2%. ProShares UltraShort QQQ, which double-shorts the NASDAQ, is up 13.7%. And ProShares UltraShort S&P 500 is up a whopping 16.8%.
Tom Lydon, editor of ETF Trends, says the time to buy is when an index trades below its 200-day moving average because it may "trigger the beginning of a change in trends."
The Russell 2000 Value Index, for example, broke below its 200-day moving average on July 23, 2007. Since then, it is down 10.6%. On the other hand, the corresponding ultra-short ETF, ProShares UltraShort Russell 2000, is up 21.4%.
Ultra-short ETFs also come in sector varieties, like the UltraShort Financials ProShares. With stocks like Countrywide Financial and Bear Stearns getting hammered recently because of credit concerns, the ultra-short financials fund is up sharply -- 28.6% in the last month, and 33.6% in the last three months.
Roger Nusbaum, chief investment officer for Your Source Financial, says he likes ultra-shorting materials as a short-term play. "Any time the market struggles, materials do really poorly," he says. ProShares UltraShort Basic Materials, for instance, is up 26.6% in the last two weeks.