Betting On the Bear in Your IRA

To make money lately, you've almost had to bet against the overall market. If you've got money tied up in IRAs and other retirement accounts, you might find the prospect of turning recent losses into gains pretty tempting.

Before you go any further, remember that over the long run, the overall stock market has risen sharply. As well as they've done recently, using strategies that only profit from falling share prices has been a losing move historically. But if you're bound and determined to tap your retirement money to profit from market downturns -- or you just want to hedge some of the positions in your portfolio -- then there are ways you can get the job done.

What you can't do
The simplest way to bet against a stock is to sell it short. In a short sale -- not to be confused with the short sales homeowners are negotiating with mortgage lenders -- you borrow shares of a company from your broker and sell them on the open market. Later, if all goes well, you buy those shares back at a cheaper price, returning them to your broker and pocketing the difference.

The problem with short-selling in retirement accounts is that because of the way tax laws interact with short-sale rules, you can't do it. To sell stocks short, you have to have a margin account. But the IRS treats margin trading in an IRA as a taxable distribution, forcing you to pay tax and penalties even if you leave your money in the account.

What works in an IRA
The rise of ETFs, however, has given investors another way to make money when stocks fall. Inverse ETFs are designed to rise when the benchmark index they track goes down. Because technically you're just buying a long position in these exchange-traded funds, you don't run into the margin issues.

If you think the entire market is going to tank, then you have plenty of different choices. There are inverse ETFs that cover all of the major indexes, including the S&P 500, the Dow, and the Nasdaq. You can also find inverse ETFs for mid- and small-cap indexes, such as the Russell 2000.

Keeping it to a sector
If you're looking for something closer to shorting individual stocks, however, betting against the overall market won't give you what you're looking for. Inverse sector ETFs don't let you pick particular stocks to bet against, but they do give you the ability to profit when a particular industry performs poorly. Here are just a few of the inverse sector ETFs available.

ETF

Stocks Represented by Fund

UltraShort Financials (SKF)

Bank of America (NYSE: BAC  ) , Citigroup (NYSE: C  )

UltraShort Health Care (RXD)

Johnson & Johnson (NYSE: JNJ  ) , Abbott Labs (NYSE: ABT  )

UltraShort Semiconductors (SSG)

Intel (Nasdaq: INTC  )

UltraShort Basic Materials (SMN)

Monsanto (NYSE: MON  )

UltraShort Oil & Gas (DUG)

ExxonMobil (NYSE: XOM  )

Source: ProShares.

Each of these ETFs tracks an index that includes 60 to 300 component stocks, with a substantial concentration in their top 10 holdings. They won't let you narrow your focus to a particular stock, but if you're bearish on a particular sector, they'll let you invest either within or outside your IRA.

Shorting stocks is risky, and you probably won't want to gamble your retirement money on a prolonged decline over the years. But if you're looking for a way to hedge some of your overall market risk, or you think one industry will underperform others, then inverse ETFs give you a way to tap your IRA assets to invest accordingly.

For more on making the most of tough markets, read about:

If you're looking for a long-term investing strategy for your retirement accounts, take a look at the Fool's Rule Your Retirement newsletter. Each month's issue has updates on our recommended asset allocations and model portfolios, along with insight on the investments you're interested in. A free 30-day guest pass is all you need to get started.

Fool contributor Dan Caplinger is an anti-debt fanatic. He doesn't own shares of the companies mentioned in this article. Johnson & Johnson and Bank of America are Motley Fool Income Investor selections. Intel is an Inside Value recommendation. Try any of our Foolish newsletters today, free for 30 days. We've invested a lot in the Fool's disclosure policy.


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