by Frank Sherosky

Created on: January 10, 2009

Did you know there is a class of investors who make more money on falling stocks in bear markets? And they do it faster. How? They take the short side. But you say you don't know how, or think it's risky. Considering the carnage in 2008, where the buy-and-hold strategy has failed miserably, it's time to change that paradigm with bear-market ETFs.

Think of all the binary, black-swan events, like a surprise headline, an election upset, or the passage of the controversial bill. Any one can come out of the blue and drive the market against your positions. All is not lost, though. Anything that has a major impact on a market segment can be played by ETFs.

Sure, you can keep the faith, buy a group of individual stocks and hold them until one day they become profitable again. Question: What happens when the entire market turns bearish and remains that way for an extended time? History already shows bear markets can last for years. The safe strategy is to buy a bear-market ETF where your stock selections reside.

Steps to Protecting Profits

First, to maximize your own profits in a bear market, you must learn how take the short side, in essence trade with the market, not against it. There are multiple ways to do it. Read "Market Wizards" by Jack Schwager; it will open your eyes. My own title, "Awaken Your Speculator Mind," has an entire chapter on shorting.

Second, shorting is not as risky as you've been groomed to believe. In fact, mutual fund managers and their sales cronies tout that shorting is gambling; but, they never mention ETFs either, as they are their competition.

Third, you don't even have to short the stocks yourself. All you have to do is buy a bear-market, exchange traded fund, better known as an ETF, and let the ETF manager do the shorting for you. He has no choice; it's part of the charter. He cannot override it either. The only choice he may have is weighting according to some market cap or other criteria. Note: It's wise to be familiar with the weighting of the stocks within an ETF.

Rationale

Think basket of stocks for a moment, like the Dow, Naqdaq and S&P 500. Realize it can be much smarter to play market indexes than individual stocks. In fact, that strategy has worked well on the long side for the index-based mutual fund industry led by Vanguard. Well, a bear-market ETF is a basket of stocks where you make money when those market baskets go down.

It is the designed purpose of an ETF to actually mirror the movement of a market segment, whether that

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