Take a Ride in the New Short Junk ETF

Bonds are about to drop like a rock.

Stocks will drop sharply in the coming year.

What could be better than an ETF that benefits from both falling bonds AND stocks?

It just so happens that there is such an animal.

When you look at the profusion of new ETFs being launched today, you find that they almost always correspond with market tops.

The higher the market, the greater the demand for the underlying, and the more leverage traders bay for it. The resulting returns for investors are usually disastrous.

But occasionally a blind squirrel finds an acorn, and if you fire buckshot long enough, you hit a barn.

That’s why I am getting interested in the new ProShares Short High Yield ETF (SJB). After riding the bull move in junk all the way up with (JNK), (HYG), I have recently turned negative on the sector.

Junk bonds have moved too far too fast. Current spreads for junk paper are now only 200 basis points over equivalent term Treasury bonds, and investors at these levels are in no way being compensated for their risk.

If the stock market starts to roll over in 2018, then the junk bond market will follow it in the elevator going to down to the ladies underwear department in the basement.

Keep in mind that when shorting the junk market, you run into the same problem you have with the (TBT), a leveraged short ETF for the Treasury bond market.

Buy the (SJB) and you are short a 4.70% coupon which, with the management fees, works out to a monthly cost of more than 50 basis points. That is a big nut to cover.

So timing for entry into this fund will be crucial.