Your Money: Betting on the end of the world

Posted: October 12, 2013

"Remember, the end-of-the-world bet has been a money-loser since the beginning of time," says Barry Ritholtz, founder of New York-based Ritholtz Wealth Management and a frequent market commentator.

What he means is, betting on the apocalypse - whether it is a U.S. debt default or another financial crisis - is most often a losing wager.

That said, and I can't believe I'm writing this, there are ways to profit in a potential debt default or crash in the U.S. Treasury market.

Charles Gradante, cofounder of the hedge-fund investor Hennessee Group, says money managers his firm speaks with are hedging their bets using exchange-traded funds.

In other words, if you think the U.S. stock market might crash as a result of the dithering between Congress and the White House, there's an ETF that could make money.

"Managers we speak to are not hedging against a 'debt default' but have bought the ProShares UltraShort S&P500 (SDS) ETF. These managers are not complacent about the shutdown but point out that all prior presidents with debt-ceiling shutdowns negotiated a settlement. Presidents Reagan, George H.W. Bush and Clinton all negotiated [their ways out of] debt-ceiling shutdowns," Gradante notes.

The ProShares UltraShort S&P500 is an exchange-traded fund that corresponds to twice (200 percent) the inverse (opposite) of the daily performance of the Standard & Poor's 500 Index.

An ETF such as the UltraShort on the S&P allows investors to double their bets on the market. Using such an instrument, you're wagering the index will fall. Plus, the ETF gives you twice the return on your wager. It is like betting 2-1 that your horse will lose.

If the S&P 500 craters, this ETF will do very well. If the market rebounds, however, it will drop in value. Given the ups and downs of the market just this past week, it could go either way. The market rallied Thursday.

Remember, these ETFs use leverage, or borrowed money, to bulk up their bet - so they are highly risky.

NAPFA in town

The last day of the National Association of Personal Financial Advisors (NAPFA) annual meeting takes place Friday at the Convention Center. Many of their sessions are archived in educational webinars available on their website (

Remember, fee-only financial planners are different from brokers. Make sure when choosing a financial planner that they are "fiduciaries" with an obligation to do right by the client, rather than just selling products.

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