I’m sure that everyone is familiar with Exchange Traded Funds (ETFs) by now.  They’ve been all the rage in recent years.  They are instruments that are traded on exchanges, just like an individual share is traded.  In other words, you can hop in-and-out during the day, short them and buy options against them.  For these reasons, they have many benefits over traditional mutual funds.

There are hundreds and thousands of ETFs designed to track all sort of underlying indexes, sectors and asset classes.  One of the ETF genres that is getting more attention recently are the short ETFs issued by Proshares and others.  These ETFs are designed to gain when the value underlying index or asset falls.  Smart Money recently published an article about these ETFs called Short ETFs Can Hedge Portfolios When Markets Sour.

“The stock market has a knack of not discriminating; it’ll whack any investor, regardless of sophistication. That’s certainly been the case this year. Record high oil prices, inflation fears, billions of dollars of write-downs, faulty mortgages and a seemingly endless list of poor economic data have caused the stock market to flounder. The Vanguard 500 Index (VFINX1) mutual fund, the centerpiece of most conservative portfolios, is down 10% in 2008. China funds, a favorite of aggressive investors the last few years, are down 21%. Everybody, it seems, is seeing red.

Next week promises to be another tough one for investors. The Federal Reserve gathers for a highly anticipated meeting on interest rates. And several prominent companies report their latest financial numbers, ringing in the beginning of another earnings season. If the Fed doesn’t cut between 50 and 75 basis points, or if some big-name companies announce troubling earnings, then investors could find themselves dealing with a raucous stock market.”  Source: Smart Money  Read more…