Shorting the Russell 2000 to Profit from the Drop

SteFou!

With the markets suffering from seemingly daily meltdowns due to COVID-19, now is a great time to consider whether your portfolio might benefit from inverse exchange-traded funds (ETFs).

One fund that seems set up to outperform given current trends is ProShares Short Russell 2000 ETF (RWM). As you may know, the Russell 2000 is an index of small-cap stocks, and these naturally more volatile companies have tended to be hit extra hard by this crisis, which smaller companies may have more trouble weathering.

In the last month, while the S&P 500 is down about 25%, the Russell 2000 is doing even worse by dropping nearly 40%. The question now is when its slide will end and its recovery begin.

RWM seeks daily investment results that correspond to the inverse (-1x) of the daily performance of the Russell 2000. Recently, its performance has been better than this goal would suggest, as it is up more than 50%. These instruments are rarely perfect, but that has been a good thing lately with RWM.

The fund is not designed for long-term holding, and to that end, its expense ratio of 0.95% is on the high side. Net assets are $297 million. The fund pays a small yield of 1.38%. Unsurprisingly, RWM has spiked upward in the last few weeks.

This fund does not hold any stocks. Rather, it invests strategically in financial instruments designed to increase in value as the Russell 2000 Index goes down. With the current daily dose of news around the world about the deadly coronavirus spreading near and far, the Russell 2000 faces strong headwinds that could keep it trending downward for a while.

If you are seeking ways to profit in this extreme volatility, ProShares Short Russell 2000 ETF (RWM) may be a valuable fund to investigate.

As always, I am happy to answer any of your questions about ETFs, so do not hesitate to send me an email. You just may see your question answered in a future ETF Talk.

Jim Woods

Jim Woods is a 20-plus-year veteran of the markets with varied experience as a broker, hedge fund trader, financial writer, author and newsletter editor. Jim is the editor of Intelligence Report, Investing Edge, the Bullseye Stock Trader, and The Deep Woods (formerly the Weekly ETF Report). His books include co-authoring, “Billion Dollar Green: Profit from the Eco Revolution,” and “The Wealth Shield: How to Invest and Protect Your Money from Another Stock Market Crash, Financial Crisis or Global Economic Collapse.” He’s also ghostwritten many books and articles, as well as edited content for some of the investment industry’s biggest luminaries. His articles have appeared on many leading financial websites, including StockInvestor.com, InvestorPlace.com, Main Street Investor, MarketWatch, Street Authority, Human Events and many others. Jim formerly worked with Investor’s Business Daily founder William J. O’Neil, helping to author training courses in the CANSLIM stock-picking methodology. The independent firm TipRanks rates Jim the No. 3 financial blogger in the world (out of more than 6,000). TipRanks calculates that, since 2012, he's made 361 successful recommendations out of 499 total, earning a success rate of 72% and a +15.3% average return per recommendation. He is known in professional and personal circles as “The Renaissance Man,” because his expertise includes such varied fields as composing and performing music; Western horsemanship, combat marksmanship, martial arts, auto racing and bodybuilding. Jim holds a BA in philosophy from the University of California, Los Angeles, and is a former U.S. Army paratrooper. A self-described “radical for capitalism,” he celebrates the virtue of making money from his Southern California horse ranch.