Exchange-traded funds have opened the doors for investors to choose from hundreds of niche markets in which to invest. But one of the most innovative things some ETF providers have done is to allow investors to bet against certain parts of the market through short or inverse ETFs. These short ETFs don't always work perfectly, but when they do, it can create big returns for investors.
Let's take a look at three short ETFs that have done especially well betting against key markets so far in 2015.
1. Natural gas
The energy markets have performed horribly so far this year, and although oil prices get most of the attention from daily traders, natural gas has seen substantial declines of its own. From levels of nearly $4.50 per million BTUs late last year, natural gas prices have fallen below $2.50 recently, and that has helped push shares of VelocityShares 3x Inverse Natural Gas ETN (DGAZ) up 42% on the year.
Few investors see much upside for the natural gas market in the near future, as inventories are at record highs, and future supplies appear to be assured for years due to the boom in shale oil and gas production. With triple downside exposure to daily movements in the natural gas market, the VelocityShares ETF has the capacity to add to its recent gains if warm weather and booming supplies continue to weigh on the underlying price of the commodity.
2. Crude oil
Crude oil prices have fallen to their lowest levels in six years, with West Texas Intermediate having recently threatened to fall below $40 per barrel. That has been bad news for energy companies, but it's brought impressive profits for investors in the ProShares UltraShort Bloomberg Crude Oil ETF (SCO -2.32%), which is up 24% so far in 2015.
One advantage oil has that natural gas doesn't is its vulnerability to changing geopolitical conditions. Some blamed the terrorist attacks in France over the weekend as a possible cause for a bounce in oil prices, and that could hurt shares of the ProShares ETF. Nevertheless, many believe plentiful supplies and challenging economic conditions that are hurting energy demand in key markets across the globe will continue to weigh on oil prices, and that could send the ProShares ETFs still higher.
3. Euro currency
Finally, the strong dollar has been a theme investors have seen for years now, and the euro in particular has suffered from a stagnant economy and a negative interest rate environment that calls into question Europe's ability to pull out of recessionary conditions. The ProShares UltraShort Euro (EUO 0.67%) has taken advantage of the slide, rising 23% even as the euro has fallen from around $1.25 to begin the year to $1.07 recently.
After a brief respite, market participants have started calling again for further weakness in the European currency, predicting eventual one-for-one parity between the euro and the dollar. So far, the Federal Reserve's reluctance to push interest rates higher has been one of the key factors holding back the dollar's advance. Yet as the central bank starts signaling the potential for a rate hike as soon as next month, foreign currency markets are starting to respond, and the result could be even further gains for a ProShares ETF that has already profited nicely from betting against the euro.
Be careful out there
Holding short ETFs for periods of years, or even months, can be extremely risky, given the daily nature of the leverage that most such funds use. When a downward trend takes hold and won't let go, though, short ETFs like these three can shine.