SH ETF offers a simple way to attack bear markets


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By Rob Isbitts

We rate the ProShares Short S&P 500 ETF (NYSEARCA:SH) a solid buy, based on what we consider to be an overwhelming historical level of risk of a major loss in the broader stock market relative to its potential for positive returns.

At a time like this, identifying, understanding, and learning how to use simple (-1x) inverse ETFs like SH is as important an idea to investors and traders as any of them. It’s been around since 2006, so it’s been tested during the financial crisis of 2007-09, the near-bear markets of 2011 and 2018, the COVID-19 meltdown in 2020, and most recently over the past nine first months of 2022.

ETF Strategy

SH aims to perform exactly opposite to the S&P 500 index. In other words, if the S&P 500 drops 1% in one day, the SH should rise by around 1%. The opposite is also expected: if the S&P 500 goes up, say 1% in one day, the HS should go down about 1%.

Exclusive ETF Ratings

  • Attack/Defense: Defense
  • Segment: Hedged Stocks
  • Sub-segment: Inverse S&P 500
  • Correlation (vs. S&P 500): very high
  • Expected volatility: Moderate

Exclusive technical evaluations

  • Short-term risk (next three months): very low
  • Short-term reward (next three months): very high
  • Long-term risk (next 12 months): low
  • Long-term reward (next 12 months): high

Analytical Highlights

Since SH is essentially the S&P 500 upside down, the more we think the S&P 500 is overvalued, the more we expect to see SH undervalued. Below is a graph of S&P 500 earnings over the past few decades – shaded areas indicate recessions. You can see that S&P 500 earnings fall sharply before and during recessions. We think this is the most likely scenario for the next two to three quarters, at least.

So while some S&P 500 annualized earnings estimates are still hovering around $200 in the year ahead, we think that’s well above where they will actually land. Translation: a very overvalued stock market at this point in the bear cycle. This is despite the fact that the S&P is already around 20% off its all-time high since January of this year.

Data by YCharts

This ETF’s annual expense ratio of 0.89% could mislead some investors. Let’s explain why this should not be the case. Investors have been conditioned to think that if an ETF has a higher expense ratio than an S&P 500 index fund, it’s “too expensive.” But when an ETF provides something that can potentially add real alpha to a portfolio, the “cost” isn’t so much the expense ratio – it’s the opportunity cost of not taking advantage of an ETF. innovative and proven as SH.

Example: Here is the return path of SH and SPDR S&P 500 Trust ETF (SPY), the most popular S&P 500 index tracking ETF, so far in 2022.



SH aims to achieve its “reverse” objective by first investing its cash in US Treasuries. This provides the collateral to execute what simulates a “short” position in the S&P 500 Index. As you cannot invest directly in an index, the fund uses a range of derivative instruments. These include, among others, swap agreements – where the fund enters into agreements with large financial institutions, in which SH obtains the opposite return of the S&P 500 as part of the agreement – and futures contracts, in particular the short sale of S&P 500 index futures.

Other than the aforementioned US Treasuries, SH does not hold any income-producing securities. In fact, its exposure to derivatives could cause it to go “short” on the S&P 500 dividend, which could slightly dampen its performance against the inverse of the S&P 500. The recent surge in yields on Treasuries could counter this, which could allow SH to accrue more interest on this collateral. Either way, income and yield are not primary factors when considering an investment in SH.

Recent News

The biggest news to impact SH was the terrible performance of the S&P 500 Index in 2022. SH has, by the nature of its construction and intentions, performed very well so far this year. This is the direct result of the S&P 500 falling nearly 20% from the start of the year to the end of September. And that tells us that SH is doing what it says it’s supposed to do. That’s all an investor can ask of any ETF.

It’s the past. The question is: what will happen to the US large cap stock market in the future, until 2022 and until 2023? When reviewing our proprietary technical ratings and assessing the broader macro landscape, we always express our final view as follows: Can the market rise, substantially and sustainably? Yes. Because it is always possible, at any time. But what really drives our market outlook, and therefore our current ETF rating on SH, is our assessment that the risk of a major loss in the S&P 500 continues to be as high as it has ever been in recent memory.

Risks for our point of view

The main risk of inverse ETFs like SH lies in understanding the mathematics of investment loss. When the market is going up and SH is falling steadily for a while, SH’s comeback isn’t as straightforward as the inverse of the S&P 500 when looking at weeks or months. For us, that just means knowing what you have when using this type of security. And, as with any traditional “long” investment, you have to do your homework.

The biggest risk to our very bearish outlook on the S&P 500 (and therefore our very bullish rating on SH) is something that investors are hoping for, but we are giving a low probability of happening: a sudden reversal by the Fed. As we see, the Fed – after years of pampering investors with low interest rates – has locked itself and the investor population into a corner. Persistently high inflation – even if it ends up hovering around 5% to 6% – is still well above what consumers are used to.


Whether it’s soaring inflation that may stay high, central banks around the world making a major policy mistake, geopolitical hotspots like Russia and China, or high short-term bond yields competing with equities, concerns abound. But what ultimately “speaks to us” is the price structure. For the S&P 500, this leans heavily bearish. In turn, this produces a very strong reward/risk trade-off for SH in the period ahead.

For the first time in nearly 50 years, the world is experiencing a major inflation problem. The Fed needs to stamp out inflation, do it with as much force as possible, and temporarily “break” the stock market if that’s what it takes. Only through so-called “demand destruction” can investors and consumers be weaned from waiting for the Fed to bail them out like in 2016, 2018 and 2020.

This should make SH and the range of other bear market-fighting ETFs very popular with investors, if our predictions are even close to accurate. Our technical, fundamental and quantitative analysis of the S&P 500 involves so much risk in almost every corner of the US stock market; we just can’t try to water down our point of view for investors.

The good news is that the loss of the S&P is the gain of SH – literally. We view SH as one of many tools that exist to help investors not only defend bear markets, but attack them for potential profit.


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