2 Funds to Consider if Fears in Iraq Trigger a Market Correction

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Things are not looking all that great on the stock market this week. There is a prevalent fear of new fighting in Northern Iraq. Religious Civil War is brewing and terrorist groups are taking hold throughout the country, presumably moving in from Syria. This is pressuring markets.

Today, acknowledging that American interests in Iraq are at risk, President Barack Obama bought the U.S. some time but did state that he won’t be sending U.S. ground troops back there. However, anything can happen. President Obama told the government in Baghdad that America needs Iraq’s leaders such as Prime Minister Nouri al-Maliki to embrace sweeping reforms to win back minority Sunnis and starve the insurgency of any popular support.

“We have enormous interests there, and obviously our troops and the American people and the American taxpayers made huge investments and sacrifices in order to give Iraqis the opportunity to chart a better course, a better destiny,” stated Obama. “We will not be sending U.S. troops back into combat in Iraq. But I have asked my national security team to prepare a range of other options that could help support Iraq’s security forces.”

Market sentiment is worsening, and it’s definitely shaping up to be a potential correction. To take some protective action, traders may want to put on some bearish positions. Those who are bearish could consider selling stock, selling covered calls on their positions, shorting stocks or buying puts. While each of these approaches has its respective benefits and risks, in this article I want to highlight several funds that could provide great short-term returns in the event of a market sell-off. These types of funds performed terribly in the last two years as the market saw up-day after up-day as well as record low volatility.

1. Direxion Daily Small Cap Bear 3X Shares (NYSE:TZA)

The Direxion Daily Small Cap Bear 3X ETF management seeks daily investment results of 300 percent of the inverse of the price performance of the Russell 2000 Index that tracks small cap stocks. It includes approximately 2,000 of the smallest securities based on a combination of their market cap and current index membership. TZA actually does not invest in equity securities or stocks.

What The Direxion Daily Small Cap Bear 3X ETF does is creates short positions by investing at least 80 percent of its net assets in financial instruments to provide leveraged and unleveraged exposure to the small cap index and the remainder in money market instruments. The Direxion Daily Small Cap Bear 3X ETF also recently underwent a reverse split in response to the bull market powering ever higher.

It now currently trades at $15.26 a share on average daily volume of 11.4 million shares. The Direxion Daily Small Cap Bear 3X ETF has a 52-week range of $14.31-$35.30.

2. Direxion Daily S&P 500 Bear 3x ETF (NYSEARCA:SPXS)

The fund can be considered for heavily leveraged bearish exposure to large cap stocks. The Direxion Daily S&P 500 Bear 3x ETF, formerly the Direxion Daily Large Cap Bear 3X fund, seeks daily investment results before fees and expenses of 300 percent of the inverse of the price performance of the S&P 500 Index. As with other funds, there is no guarantee the fund will meet its stated investment objective and is subject to slippage as described above. The fund also has a higher 1.14 percent annual expense ratio.

The Direxion Daily S&P 500 Bear 3x ETF management team likes to create short positions by investing at least 80 percent of its net assets in: futures contracts; options on securities, indices and futures contracts; equity caps, collars and floors; swap agreements; forward contracts; short positions; reverse repurchase agreements; ETFs; and other financial instruments that, in combination, provide leveraged and unleveraged exposure to the S&P 500. Given this approach, in times of market sell-offs, the Direxion Daily S&P 500 Bear 3x ETF will deliver outsized returns. Thus, this fund should be considered by those who seek to profit from panic that could result from a fast sell-off that jolts the market. The Direxion Daily S&P 500 Bear 3x ETF currently trades at $27.18 a share. The Direxion Daily S&P 500 Bear 3x ETF has average daily volume of 1.29 million shares exchanging hands. SPXS has a 52-week trading range of $26.27-$59.40.

Conclusion: Market sentiment is worsening on the back of the fear in Iraq. We don’t need to dump positions all at once here. A correction could be brewing and so some protective action should be considered. Take some profits. And, to capitalize on a broader market selloff, I recommend these two bearish funds that do incredibly well during corrections.

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