These inverse ETFs will help you build a little protection against market declines into your portfolio.
ProShares UltraShort Dow30 ETF (DXD) or the ProShares UltraShort QQQ (QID)
from Cabot Benjamin Graham Value Investor
The lack of buyers is disappointing and could lead to further declines in the indexes.
I advise taking action to counteract further declines. Buying inverse index ETFs will help soften possible future losses. When the stock market decreases, inverse index ETFs will rise, and when the stock market rises, inverse index ETFs will decline.
I recommend buying the ProShares UltraShort Dow30 ETF (DXD 24.85) or the ProShares UltraShort QQQ (QID 38.77). The DXD seeks daily investment results, before fees and expenses, which correspond to two times the inverse of the daily performance of the Dow Jones Industrial Average. The QID seeks daily investment results, before fees and expenses, which correspond to two times the inverse of the daily performance of the NASDAQ 100 Index.
The Dow Jones Industrial Average includes 30 large cap companies that derive a relatively large percentage of their business from overseas. These companies will not fare well if the economies in China, Russia, Brazil and other parts of the world continue to slow. Therefore, the ProShares UltraShort Dow30 ETF will become a good investment and a hedge against further declines in the U.S. stock market caused by increasing problems abroad.
The NASDAQ 100 Index contains many technology companies that also sell a lot of their products and services overseas. The Nasdaq has risen sharply during the past several months and could be vulnerable to a substantial decline.
If your portfolio contains conservative holdings, I suggest adding DXD. If you own fairly aggressive stocks, I advise adding QID, which is more volatile. You can, of course, add both of these inverse ETFs to your portfolio, if you feel you need added protection and are worried about the possibility of further losses in the stock market.
I recommend that your allocation to the ProShares UltraShort Dow30 ETF (DXD) or the ProShares UltraShort QQQ (QID) should be 5% to 10% of your portfolio. Perhaps less if your portfolio is well diversified and you are holding cash. Maybe a tad more than 10% if you feel you need lots of protection.
My 5% to 10% guidelines apply if you buy just one of the ETFs, of if you buy both ETFs. If you buy both DXD and QID, you should not exceed my 10% upper limit total unless your portfolio is speculative.
J. Royden Ward, Chief Analyst, Cabot Benjamin Graham Value Investor, www.cabot.net, 978-745-5532, August 25 & 26, 2015