New Members: Be sure to confirm your email address by clicking on the link that was sent to your email inbox. You will not be able to post messages until you click that link.

Portfolio Protection using Inverse ETF's

I have a portfolio of approximately 20 stocks and would like to purchase an inverse ETF to help mitigate any downside of the market. Is there an easy calculation on how many shares of say...the SQQQ inverse etf, that I should buy to try to keep me somewhat even, if market downside occurs? I was thinking the ATR and number of shares would be part of the calculation but not sure on how to approach.


  • Options
    I have no qualifications to advise anyone about anything, but here's what Investopedia says about inverse ETFs:

    "Inverse ETFs are not long-term investments since the derivative contracts are bought and sold daily by the fund's manager. As a result, there is no way to guarantee that the inverse ETF will match the long-term performance of the index or stocks it is tracking. The frequent trading often increases fund expenses and some inverse ETFs can carry expense ratios of 1% or more."

    So, apparently, if you want to hedge on a particular day and during the trading session, inverse ETFs can help you, but if you are hedging against, say, a six week decline, then it seems these ETFs are not the way to go.

    Another thing to keep in mind is, if the market goes up instead of down after you get into the ETF, your stock gains are erased by the ETF losses, and more than dollar for dollar because of fees. So you could end up with a net loss even though the market goes up.

    If you are convinced the market is going down, but don't want to sell your positions (maybe for tax reasons or you rely on the income), you could consider selling calls (best if the options on the stocks you own are very liquid). If the market goes down, you keep the premium to offset at least part of your (possibly unrealized) losses.

    If you guess wrong and the market goes up, you may have to give up your position - which cuts your participation in future profits, but you get to keep your profits up to the calls' strike price.

    Of course, if its a dividend stock, you also give up the dividend if you get called. If you are relying on the income you might not want to do that. But then, if you are in it for the income, you won't sell it even if the price goes down, as long as the dividend is safe, so you don't need to hedge. If the dividend is not safe, you want to sell it anyway, not hedge it.

    But again, I am no financial advisor, so do your homework.

Sign In or Register to comment.