Leveraged ETFs are a good alternative to using margin to increase your buying power but what if a bear market is in play and you don't really want to increase your buying power? Traditionally, investors would start scouting for short positions to take advantage of the downside potential in the market but that comes with the disadvantages of margin again. A leveraged ETF may be a great solution in this situation.
You can see part one of this series on leveraged ETFs here.
You can see part two of this series on leveraged ETFs here.
Shorting stock means that you borrow the stock from your broker and sell it for today's price hoping to buy it back later and pay your broker back when the stock is at a much lower price. Selling high and buying low like this is one way to leverage a bear market. Typically, your broker will require you to leave half of theÂ value of the stock you have shorted in your account in cash. They then loan you the remainingÂ amount required for the stock that was shorted.Â
Shorting stock is a little complicated and the charges on the loan made by your broker increases trading costs. As an alternative there are leveraged ETFs that take care of the shorting for you. For example, in the video, I talked about the difference between the QQQQ, which is a traditional ETF that follows the Nasdaq 100 index and QID a leveraged short ETF that replicates the returns from using margin toÂ short theÂ QQQQ.
Because QID is the inverse ofÂ the QQQQÂ it will rise in value as theÂ bear market falls.Â This simplifies the process of taking advantage ofÂ a bear market and avoids theÂ margin chargesÂ from your broker.Â Short ETFs like this are not just limited to stock indexes; you can find themÂ for industry sectors, commodities and even currencies.Â
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