November 10, 2020

Using ETFs To “Time” The Market

Using ETFs To "Time" The Market
Using ETFs To "Time" The Market

Most legitimate market participants will tell you not to try and ‘time’ the market. What they mean by that is don’t try and predict when the market is going to fall and when the market is going to climb higher. Historically, this has been extremely difficult to predict with any real accuracy, but ETFs could make it easier for you to accomplish.

So, most advisors tell clients to stay invested in the markets and ride the ups and downs. I fully agree with this thinking because it is very difficult to predict major market moves. For example, while some people did predict the market would crash in March, not so many thought it would tear right back higher as quickly as it did. Even those who did predict the move higher had a hard time predicting wh the bottom of the fall was and when the actual bottom was and, therefore, the absolute ‘best’ time to get back in.

The biggest problem with trying to time the market is that you will miss part of the moves back higher. And knowing when the right time to get back in is more difficult than just riding it out the wave up and down.

Think about it this way. If you sell ABC stock at $100 because you think the market is about to crash. And let’s say that you were right about the market falling. When do you repurchase ABC? At $98? $95? Maybe $90. Or maybe you wait until it hits $70?

Or, worst-case scenario happens, and you wait too long to buy back in because you thought, like some people believed this past summer, that we might have a double-dip drop. So, ABC stock falls to $90; you don’t buy, and then it runs to $105, or $5 more than where you originally sold it. Do you buy now or continue to hold out because you think the double-dip is coming? Well, what if that never happens, and the stock runs to $115?

Now you just missed out on $15 per share because you wanted to save yourself the $10 unrealized loss when it initially fell. Which, by the way, you would have recovered from if you just did nothing. My advice is not to sell your holdings if you think things are about to get wild. Instead, hedge yourself against a drop, and that way, if the market falls, you still make some money on the way down but don’t miss out on the run higher when things turn around.

Let’s take a look at a few ETFs that will allow you to hedge against a market drop.

My two favorites are the ProShares UltraPro Short S&P 500 ETF (SPXU) and the ProShares Ultra VIX Short-Term Futures ETF (UVXY). The SPXU is a 3x leveraged S&P 500 short ETF, which means if the S&P 500 falls, this ETF will increase three times as much. This ETF allows you to profit when the S&P 500 falls. So, this is an excellent hedge if you are heavily invested in S&P 500 stocks or ETFs that closely follow the index or its tops holdings.

The UVXY ETF is a little different in that it provides 1.5 times leverage to an index made up of first and second-month VIX futures. UVXY is designed to capture the volatility of the S&P 500, but it does so with the futures, not necessarily the VIX index and not the S&P 500 index itself. This is a little confusing to most investors, but in short, if the market starts crashing, the UVXY and SPXU will both go up in value.

Now the adverse will occur if the markets go higher. Both these ETFs will lose value if the markets climb, and since they are both leveraged, they will lose some value due to daily rebalancing, even if the market is falling. These products are made to be held for short periods, daily, not long periods.

But, with that being said, you could hold these for a week or more if they are intended to act as a hedge for you against a big market drop based on some predictable event (IE, a US Presidential Election?).

Investors need to remember that while these products can offer hedge protection, that is not guaranteed, and investors could lose money both on their long-term holdings and these ETFs in some situations. Furthermore, you do once again have to consider that you don’t know when the bottom is going to hit, and therefore, you will need to take the hedge off and take some profits before the market potentially ‘snaps back’ and goes higher. Everyone should consider their situation, and what they can use to help avoid portfolio selling during turbulent times, and for some, these two ETFs may offer a reasonable solution.

Matt Thalman
INO.com Contributor – ETFs
Follow me on Twitter @mthalman5513

Disclosure: This contributor owned shares of ProShares UltraPro Short S&P 500 ETF at the time this blog post was published. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.