What are Large Cap Stocks?
Large cap stocks are stocks with over $10 billion in market cap (the price of the stock multiplied by the number of shares outstanding). They include well-known names such as Amazon, Johnson & Johnson, Honeywell and Gilead Sciences. Large cap stocks are highly liquid and are components in indexes that are tied to financial instruments around the globe. Two of the major indexes we’ll mention are the S&P 500 and the NASDAQ 100 and we’ll list a large cap inverse ETF to hedge each.
What’s the Concern for Large Cap Stocks?
Companies in S&P 500 Index have bought back stock at a record pace and have actually become the largest buyers in the market. Some have equated this to putting existing shareholders on margin.
The fervor for companies in the NASDAQ 100 hearkens back to the dotcom era. The frothiness in the biotech space and the level to which the giant tech companies have become so large. Passive ETFs pegged to indexes like the S&P 500 and NASDAQ 100 have propelled the individual components higher.
How to Hedge Large Cap Stocks with Inverse ETFs
As the name implies, the S&P 500 index comprises 500 of the largest and well-known stocks listed in the U.S. The S&P 500 it’s largest sector weightings are technology, financials, health care and industrials.
A better alternative is the ‘Short S&P 500’ (SH), an inverse ETF which better represents the broader stock market. It is market cap-weighted and has more financial products tied to its performance than any other. It is the largest inverse stock ETF at over $1.6 billion in assets under management and it trades millions of shares per day. It is a single inverse ETF (-1x) and aims to return the inverse, or opposite of the Standard & Poor’s 500 Index on a daily basis.
No one sector really dominates the index, making it a good proxy for the market and for a (seemingly) well-diversified portfolio. And even though the companies are all U.S. based, approximately 1/3 of earnings come from outside the U.S. This ratio of 70/30% is basically the way many portfolios are constructed (2/3 domestic equity and 1/3 international) so this should hedge a slowdown in other parts of the world (and your portfolio). Globalization of the last decade or so has made so many international markets interdependent that they’re starting to correlate more than ever before.
Nasdaq 100 Inverse ETF
The ‘Short QQQ’ is an inverse ETF for the NASDAQ 100 tracking ETF, the QQQ’s and aims to deliver the opposite return of the ETF on a daily basis. It has over $230 million in assets under management and has around 300k shares traded on a daily basis. Note that having the QQQ is slightly different from having the NASDAQ 100 as it’s benchmark. The QQQ is traded as an ETF and thus can act differently, at least on a short-term basis, from the NASDAQ 100 index. This occurred during the “flash crash” in August 2015 when market makers stepped away when they couldn’t get quotes for the largest components in the QQQ ETF.
This level of concentration is one of the weaknesses in owning the QQQ but one of the benefits of owning an inverse ETF on the QQQ such as the single inverse QQQ ETF, PSQ, the double inverse QQQ ETF, QID and the triple inverse QQQ ETF, SQQQ.
Inverse ETFs mentioned:
* (components of our Best Inverse ETF list)