With the continuous headwind and the ups and downs of the market, how can investors remain invincible?

Huang Xianen, an analyst at KGISecurities, pointed out in a recent analysis that many data show that the global economy is facing more downside risks, which also puts pressure on financial markets. October is usually one of the most volatile months for global stock markets. This year, the global economy faces many uncertainties, including the Sino-US trade talks, the investigation into the impeachment of US President Donald Trump and Brexit.

For example, on Thursday, U.S. stocks closed lower on Thursday, with the Dow Jones Industrial average down 140.46 points on fears of Trump's impeachment. In addition, the Chicago PMI index fell 3.9 points to 43.2 points, the lowest since December 2015. In particular, new orders fell significantly, falling to 37.0 points, the lowest since March 2009.

The president was impeached,PMIContinued decline, risk aversion made U. S. bonds, funds and other markets sought after.

"in such a situation, reverse ETF may be an ideal tool to profit from the market," Huang said. "

What is reverse ETF?

If investors expect the market to fall or enter a bear market, they will short stocks. One of the best ways to short stocks is to use reverse ETF.

A reverse ETF is an investment product that is in reverse to the price of a linked asset. It makes a profit by using a variety of derivatives when the underlying benchmark falls. Investing in reverse ETF is similar to short selling (borrowing securities and selling short in order to make a profit by buying back at a lower price). But reverse ETF allows investors to make money when the market or related index falls without having to sell short.

As a simple example, if you buy a reverse ETF of Apple Inc, if the price of Apple Inc falls by 1% without leverage, your reverse ETF value will rise by 1%, and vice versa.

Usually investors invest in reverse ETF, the first thing is to keep an eye on the market situation, that is, they are sure that a certain asset or stock will fall sharply in the future. Of course, the reality is not necessarily a correct guess, but only the expectations of investors. They will buy the relevant reverse ETF products, hoping to make a full profit when the market falls.The second kind of investors want to have a hedging effect, so that when the main investment encounters a big price turn, it does not have to lose too much.

What products are there on the market?

ProShares and Direxion are the two major providers of reverse ETF, and there are about 125 related ETF in the market. Most of them are listed on American exchanges.

In addition to double leverage products (- 1x), there are also reverse ETF with double or triple leverage on the market.Investors' gains and losses may be magnified by the same multiple.For example, Direxion is three times bearish daily on small-cap stocks ETF (Direxion Daily Small CapBear 3X Shares), an ETF that tracks the Russell 2000 small-cap index.

The author chose three reverse ETF from the market that track the S & P 500 to give investors an example. The purpose of this is to facilitate analysis and comparison.It does not mean that these three ETF are superior to other reverse ETF.

• 1. ProShares reverse 1 times S & P 500

Based on the S & P 500, the ETF aims to give investors returns corresponding to the index when the index falls. Investing in ProShares to double the S & P 500 is like shorting stocks, but it would be much cheaper and more convenient than the latter.

• 2. ProShares reverse 2x S & P 500s

ProShares reversed twice as much as the S & P 500 trying to achieve twice the reverse performance of its tracking index. When the s & p 500 is down 1%, the return on the ETF is 2%. Because the ETF uses leverage, it is riskier than the ProShares to reverse twice as much as the S & P 500s.

• 3. ProShares reverse 3 times S & P 500s

3x leverage is the highest multiple of levers and reverse ETF. ProShares reverse 3 times the S & P 500's goal is to achieve three times the reverse performance of the S & P 500. Triple leverage provides the highest rate of return and the highest risk.

Except for the different multiples, the structure and operation methods of the above three reverse ETF are all the same. They track indices by investing in derivatives such as options and swaps.

A few points to note:

1. Reverse ETF is a specific investment product (SIP), investors must pass the audit and evaluation before they can invest.

two。 Only suitable for short-term operation.

Reverse ETF management fees are usually higher.Long-term holding will affect the rate of return and is not suitable for long-term investment.

Chen Yijin, an equity analyst in the research department of FSMOne.com stocks and listed funds, said in an interview with Lianhe Zaobao earlier: "reverse ETF is a double-edged sword that can help investors reduce losses and may also reduce investors' profits. "

Chen Yijin uses an example to illustrate: suppose an index and the reverse ETF that tracks it both start at 100. On the first day of trading, the index fell 10 per cent, from 100 to 90, while the reverse ETF rose 10 per cent, from 100 to 110. On the second trading day, the index rose 11%, from 90 to 100, while reverse ETF fell 11%, from 110 to 98.

As an example, the index has regained its lost ground, and reverse ETF is still down 2 per cent. Therefore, one-day trading is the best way to invest in reverse ETF.

3. If the leverage doubles the product, the investor's loss or profit may be magnified by the same multiple.

4. Attention should also be paid to liquidity costs and counterparty risks.

When investing, you must pay attention to avoid products that are illiquid, expensive, opaque in pricing and complex in structure.

Secondly, we should pay attention to counterparty risk.Generally speaking, ETF tracks index performance by investing in real stocks, but the reverse ETF is by investing in derivatives. If the counterparty defaults, the price of the reverse ETF may plummet, but the real index may not be affected.

Investment conclusion

To sum up, when the market trend is downward, investors want to reduce losses, reverse ETF is a tool that can be considered, but only short-term operation.

Kay Van-Petersen, global macro strategist at Saxo Financial, also pointed out in an interview that the long-term trend of the stock market is upward, with the S & P 500 up more than 300% since its low in 2009.