The Inverse ETFs that I highlighted in October are really paying off with an average three month gain of 21%. I will admit that I didn’t buy any of them but I know several readers that were real excited about their potential and their ease of use.

Many traders are turned off by the complexities of shorting or just don’t feel comfortable about the process so Inverse ETFs present them with a simple solution. Trading Inverse ETFs allows traders to place an order that mimics the buying and selling process of a regular stock but you are now betting the short side instead of the long side. These trades allow the investor to ride the market down without the complexities or uncomfortable jitters of shorting.

As I wrote in October, Inverse ETFs are specifically designed to move in the opposite direction of the underlying market index. Thus, if the Dow Jones Industrial Average declines by 1 percent, its inverse ETF (the Short Dow 30 ProShares Fund, symbol DOG) will rise by 1 percent. When the S&P 500 falls by 1 percent, the Short S&P 500 ProShares Fund (SH) will rise by 1 percent.

Take a look at the gains of the four ETFs I highlighted prior to the market opening on October 17, 2007:

• DOG: 17.47% peak gain this week
• SH: 19.21% peak gain this week
• PSQ: 22.83% peak gain this week
• RWM: 23.07% peak gain this week

I don’t recommend jumping into these ETFs right this moment (the previous opportunity was in October when I presented them) but keep an eye on the market and look to pounce when the major indexes bounce higher and start to show overbought signs. Be patient just as you would with trades on the long side.

Have you ever wanted to short the market because you knew it was going down but your were too overwhelmed, nervous or even scared because you were unsure of how to do it. Well, Inverse ETFs may be your thing. They have been around for more than a year but are starting to gain some popularity as volume has been increasing in recent months.

SFO Magazine has an article this month titled:
The New Kid on the Block: Day Trading with ETFs
by: Ken Tower

In the article, Ken has a section titled Inverse ETFs—A Dream Come True and goes on to speak briefly about them:

Traders have long had the ability to sell short stocks or buy put options in order to profit during market declines, but the recently introduced inverse ETFs make the process much easier and, for me, represent a dream come true.

Short selling is a messy business that never caught on with most traders. One has to open a margin account, make sure the stock is available to borrow and worry about it being called back unexpectedly. ETFs can be sold short (and are exempt from the uptick rule), but the idea of selling high and buying low remains unpopular.

The new crop of short ETFs solves this problem. They are specifically designed to move in the opposite direction of the underlying market index. Thus, if the Dow Jones Industrial Average declines by 1 percent, its inverse ETF (the Short Dow 30 ProShares Fund, symbol DOG) will rise by 1 percent. When the S&P 500 falls by 1 percent, the Short S&P 500 ProShares Fund (SH) will rise by 1 percent. That’s right, the inverse ETF goes up in price. See Figures 1 and 2. This is excellent because it’s exactly with what traders are familiar—stocks that go up. By reviewing both the long ETF and the short ETF of the same market average, one may gain additional insight into the market direction.

“Take a look at the DIA, SPY, QQQQ or IWM (Russell 2000 ETF). If those don’t look attractive, their inverse funds (DOG, SH, PSQ and RWM) are likely to impress.” - Ken Tower

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