I'm sure like most of you I am getting a touch twitchy about the state of the NASDAQ / S&P 500 markets at the moment so I've been looking at some ways to bet against the market.
One way I've come across is using WisdomTree's funds which offer a 1X or 3X short of the main markets including the FTSE100. It seems my ISA account lets me buy these and any losses would be limited to what I put in.
Anyone have any experience with these funds?
Apologies first for not answering your question directly - I don't deal in any short funds as I think they are high risk and way beyond my expertise. If I want to go short, I usually short an index as a spread bet - but I would only do that in exceptional circumstances. (The profits, if any, are tax free so same benefits as an ISA.) If I'm seriously worried that the markets overall are going to go down, I either sell or do nothing - doing nothing is often a surprisingly good strategy unless you own a crystal ball.
With regard to the NASDAQ / S&P 500, I personally am not too worried. I think we're seeing a 10% correction rather than a black swan. In fact, I would say - statistically - it's a bad time to short the NASDAQ. If it is going to dip further, the 100 MA looks like support, so maybe another 2-3% at most. And Sod's law is that it will bounce just after you've laid your short bet.
The S&P 500 could go either way, but I don't see the current dip going down much below another 4-5%, and it could equally well go up 4-5% over the next week.
It's worth noting that both the NASDAQ and S&P 500 are in strong uptrends. Interest rates are historically low. Equities still offer the best returns for investors. Probability favours the continuation of the uptrends. I could be wrong and I often am wrong. But that's my take at the moment. Good luck with whatever you decide.
I will be blunt because that will help you more than being nice.
Go ahead and buy these things and lose the money that you put in. This will teach you much more effectively than listening to someone else. Hopefully you will learn that:
1. You should only short the indicies if you have a mechanical system for doing so. Shorting because you are "twitchy" is the absolute worst thing you can do.
2. Your post implies that you want to short the markets for a longer period than just today. In that case, stay away from these products, particularly the leveraged ones. To understand why, do some googling of the terms "inverse etf" and "rebalanced daily".
Appreciate the feedback but I think you read more into my question than I intended though. I've watched a few videos and read several articles on them. Didn't seem to make sense hence the question.
As for twitchy, I've a large company pension sat with 44% exposure to equities in the US that I can't adjust the allocation of. I'm in my early 40's and I am looking at ways to counteract a drawdown so that I can retire early as planned.
I don't plan on a GameStop yolo, just asking if anyone has looked into the products and used them.
I have used them on the FTSE100 and FTSE 250, they were very good at offsetting some of my losses last March, 2020 but they are not such a good idea when markets are just going up and down a few % each day. The 3x levered ones don't always behave as you expect, one day the index fell 6% but the 3x short did not go up 18%, it was only around 9%.
If you use the unlevelled index short then you are going to have to tie a lot of money up to hedge your US exposure and even then you may lose out. If you think they will be a major market correction then maybe worth investing in these products otherwise I would ride it out.
Thanks Herbie, makes sense. I tried to figure out the maths of them but it was unintelligible.
Not sure why you find the maths unintelligible. Perhaps a simple example will make it clear.
Imagine that you wanted to short the S&P, so you bought an inverse ETF. Then you held it for 2 days over which the S&P daily returns were -20%, +25%.
The return of the index = 0%, because 1 x 0.8 x 1.25 = 1
But the return of the inverse ETF = -10%, because 1 x 1.2 x 0.75 = 0.9
If you bought a 2 x inverse ETF instead, its return would be -30%, because 1 x 1.4 x 0.5 = 0.7
In terms of the maths, that's all you need to understand. In terms of the real world, what you need to understand is that unless you are trading intraday (which is what these things are designed for) then you are facing a headwind. The longer you hold the for, the more leverage you use and the more volatile the returns (as in a down leg), the greater the headwind becomes. These things are unsuitable to your needs.
I get the basic maths but as Herbie points out the actual values do not match the expected values of the index and funds. There is some slippage there and its beyond the 0.75% charge by Wisdom Tree and varies throughout time.
And you seem to think I am desperate to short the market Michael Burry style while listening to thrash metal. That's not what I had in mind at all and hence I am was asking for experience.
Anyway, I'll continue to look at other options.
