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SPDN: An Inexpensive Way To Profit When The S&P 500 Falls

Summary
SPDN is not the largest or oldest way to short the S&P 500, but it’s a solid choice.
This ETF uses a variety of financial instruments to target a return opposite that of the S&P 500 Index.
SPDN’s 0.49% Expense Ratio is nearly half that of the larger, longer-tenured -1x Inverse S&P 500 ETF.
Details aside, the potential continuation of the equity bear market makes single-inverse ETFs an investment segment investor should be familiar with.
We rate SPDN a Strong Buy because we believe the risks of a continued bear market greatly outweigh the possibility of a quick return to a bull market.
Put a gear stick into R position, (Reverse).
Birdlkportfolio

By Rob Isbitts

Summary
The S&P 500 is in a bear market, and we don’t see a quick-fix. Many investors assume the only way to navigate a potentially long-term bear market is to hide in cash, day-trade or “just hang in there” while the bear takes their retirement nest egg.

The Direxion Daily S&P 500® Bear 1X ETF (NYSEARCA:SPDN) is one of a class of single-inverse ETFs that allow investors to profit from down moves in the stock market.

SPDN is an unleveraged, liquid, low-cost way to either try to hedge an equity portfolio, profit from a decline in the S&P 500, or both. We rate it a Strong Buy, given our concern about the intermediate-term outlook for the global equity market.

Strategy
SPDN keeps it simple. If the S&P 500 goes up by X%, it should go down by X%. The opposite is also expected.

Proprietary ETF Grades
Offense/Defense: Defense

Segment: Inverse Equity

Sub-Segment: Inverse S&P 500

Correlation (vs. S&P 500): Very High (inverse)

Expected Volatility (vs. S&P 500): Similar (but opposite)

Holding Analysis
SPDN does not rely on shorting individual stocks in the S&P 500. Instead, the managers typically use a combination of futures, swaps and other derivative instruments to create a portfolio that consistently aims to deliver the opposite of what the S&P 500 does.

Strengths
SPDN is a fairly “no-frills” way to do what many investors probably wished they could do during the first 9 months of 2022 and in past bear markets: find something that goes up when the “market” goes down. After all, bonds are not the answer they used to be, commodities like gold have, shall we say, lost their luster. And moving to cash creates the issue of making two correct timing decisions, when to get in and when to get out. SPDN and its single-inverse ETF brethren offer a liquid tool to use in a variety of ways, depending on what a particular investor wants to achieve.

Weaknesses
The weakness of any inverse ETF is that it does the opposite of what the market does, when the market goes up. So, even in bear markets when the broader market trend is down, sharp bear market rallies (or any rallies for that matter) in the S&P 500 will cause SPDN to drop as much as the market goes up.

Opportunities
While inverse ETFs have a reputation in some circles as nothing more than day-trading vehicles, our own experience with them is, pardon the pun, exactly the opposite! We encourage investors to try to better-understand single inverse ETFs like SPDN. While traders tend to gravitate to leveraged inverse ETFs (which actually are day-trading tools), we believe that in an extended bear market, SPDN and its ilk could be a game-saver for many portfolios.

Threats
SPDN and most other single inverse ETFs are vulnerable to a sustained rise in the price of the index it aims to deliver the inverse of. But that threat of loss in a rising market means that when an investor considers SPDN, they should also have a game plan for how and when they will deploy this unique portfolio weapon.

Proprietary Technical Ratings
Short-Term Rating (next 3 months): Strong Buy

Long-Term Rating (next 12 months): Buy

Conclusions
ETF Quality Opinion
SPDN does what it aims to do, and has done so for over 6 years now. For a while, it was largely-ignored, given the existence of a similar ETF that has been around much longer. But the more tenured SPDN has become, the more attractive it looks as an alternative.

ETF Investment Opinion

SPDN is rated Strong Buy because the S&P 500 continues to look as vulnerable to further decline. And, while the market bottomed in mid-June, rallied, then waffled since that time, our proprietary macro market indicators all point to much greater risk of a major decline from this level than a fast return to bull market glory. Thus, SPDN is at best a way to exploit and attack the bear, and at worst a hedge on an otherwise equity-laden portfolio.

Avoid Excessive Over-Charges or Unethical Business Practices

Nothing is more upsetting than receiving a statement showing hidden excess billing charges or being cheated by an unscrupulous dealer. No one likes to be taken advantage of.They may be justified or unjustified surprises, some tantamount to being classified as unethical “rip-offs”. Unfortunately, some may be accidental accounting duplications; others may be embedded surcharges that you were not aware that you would be charged for like hotel usage. Others may be fraudulent or deceptive professional services.The worst types are “scams” where unscrupulous charges are created intentionally, or planted. Some of the most notorious industries that can create excess charges are: hotels, hospitals, auto repair, veterinarians, dentists, plumbers, website designers, and computer repair technicians.Initially, be aware how you present yourself, inadvertently announcing your income status. Walking in with a Gucci bag, driving a BMW, prices can escalate.Coming from a frugal, small Dutch Iowa town, we were taught monetary principles ingrained generations back. Immigrating to the United States in the 1800s, the Hollanders wore velvet breeches and conducted business with gold coins. They soon found they were cheated wherever they went, and finally, resorted to an “unassuming-frugal-chameleon survival code”.In other words, they learned not do display their affluence, or they would be charged more in business transactions. Currently, remaining unpretentious, few drive new high end cars and do not flaunt wearing expensive apparel with flashy accessories.There is something to be said for this dictum, because if you look foolhardy, or appear pretentious with careless spending habits, you become subject to excess service rates. There is bias with older people, teens, and women, who become targets.Or, if the proprietor finds that you are in an “emergency situation”, you can be targeted, and unethical business practices may come into play.Auto repair establishments, whether in a city or out “in the middle of no-where” like rural Utah, Kansas, or Montana, will double charge if they think they can “get away with it,” when you lack alternative options and need your vehicle.We recently had our automobile towed from a near city’s hospital to a local repair garage. Then, the same week, our second car had severe mechanical problems, but luckily, happening near the garage we routinely use, so we drove the car in, limping all the way. The proprietor, knowing we were in a health-state emergency situation, gave us excessive double-cost estimates to repair the two autos.Refusing to be victimized, the next day I called several other places to compare repair rates, and had both cars towed, a second time, from one garage to the next. I saved nearly one thousand dollars by being alert and on the offense.One of the most surreptitious situations is when you unwittingly trust an unethical dentist. With many small and midsize towns becoming filled with dental competition, some find unscrupulous ways to create cash flow. They know they can get away with fraudulent work, because their colleagues will not acknowledge investigative inquiries regarding their missteps to the State Dental Board.For some time, I was fortunate to have a reputable dentist, who did fine, professional work. When he retired, I went to an acquaintance who I thought was highly regarded. Then, a minor traffic accident unfortunately loosened four front teeth. Subsequently, to stabilize the fragile teeth, my new dentist inserted four posts without root-canals, which would create abscesses. Much successive dental work would be then required, perfect cash flow. Conversely, the expected consequential plan would back-fire. The damaged teeth all abscessed simultaneously, rather than piece-meal.Was this dentist merely a bad dentist performing shoddy work? At first, it was hard to determine.Local consulted specialists were obviously appalled, but had little to say. They advised that they had never seen anything like that before, as root canals for posts were basic Dental 101. I would have to go to another state to get a true evaluation for corrective surgery.I was further dismayed when I consulted a Dental School regarding the issue, and overheard students joking about how easy it was to practice unethical dentistry without fear of repercussions. And, make good money doing it.To avoid your own dental horror story, if you question any work at any point of a procedure, find a reputable dentist, or dental school, in another state for a complete evaluation. A local second-opinion dentist will not want to reveal or try to correct any faulty work. Remaining professionally bonded with their local colleagues, they will refer you back to the dentist who created the mess.The best way to avoid hidden fees and unethical business services is to:Research the person’s or the business’ background and reputation. Go online. Talk to people (not their references who may be shams) who have used their services. Inquire within other businesses, like real estate firms, if they have conducted work with them.
Be certain you are working with the authorized decision maker or owner when making a purchase or arranging for services.
Up front, obtain second, even third opinions regarding the work to be done.
Ask questions. Obtain firm, descriptive cost estimates in writing, and establish specific guidelines up front.
Be aware of your surroundings; read body language.
Do not sign any document without carefully reading the fine print.
Carefully review all billing statements and inquire if you note discrepancies

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Alternative Financing Vs. Venture Capital: Which Option Is Best for Boosting Working Capital?

There are several potential financing options available to cash-strapped businesses that need a healthy dose of working capital. A bank loan or line of credit is often the first option that owners think of – and for businesses that qualify, this may be the best option.

In today’s uncertain business, economic and regulatory environment, qualifying for a bank loan can be difficult – especially for start-up companies and those that have experienced any type of financial difficulty. Sometimes, owners of businesses that don’t qualify for a bank loan decide that seeking venture capital or bringing on equity investors are other viable options.

But are they really? While there are some potential benefits to bringing venture capital and so-called “angel” investors into your business, there are drawbacks as well. Unfortunately, owners sometimes don’t think about these drawbacks until the ink has dried on a contract with a venture capitalist or angel investor – and it’s too late to back out of the deal.

Different Types of Financing

One problem with bringing in equity investors to help provide a working capital boost is that working capital and equity are really two different types of financing.

Working capital – or the money that is used to pay business expenses incurred during the time lag until cash from sales (or accounts receivable) is collected – is short-term in nature, so it should be financed via a short-term financing tool. Equity, however, should generally be used to finance rapid growth, business expansion, acquisitions or the purchase of long-term assets, which are defined as assets that are repaid over more than one 12-month business cycle.

But the biggest drawback to bringing equity investors into your business is a potential loss of control. When you sell equity (or shares) in your business to venture capitalists or angels, you are giving up a percentage of ownership in your business, and you may be doing so at an inopportune time. With this dilution of ownership most often comes a loss of control over some or all of the most important business decisions that must be made.

Sometimes, owners are enticed to sell equity by the fact that there is little (if any) out-of-pocket expense. Unlike debt financing, you don’t usually pay interest with equity financing. The equity investor gains its return via the ownership stake gained in your business. But the long-term “cost” of selling equity is always much higher than the short-term cost of debt, in terms of both actual cash cost as well as soft costs like the loss of control and stewardship of your company and the potential future value of the ownership shares that are sold.

Alternative Financing Solutions

But what if your business needs working capital and you don’t qualify for a bank loan or line of credit? Alternative financing solutions are often appropriate for injecting working capital into businesses in this situation. Three of the most common types of alternative financing used by such businesses are:

1. Full-Service Factoring – Businesses sell outstanding accounts receivable on an ongoing basis to a commercial finance (or factoring) company at a discount. The factoring company then manages the receivable until it is paid. Factoring is a well-established and accepted method of temporary alternative finance that is especially well-suited for rapidly growing companies and those with customer concentrations.

2. Accounts Receivable (A/R) Financing – A/R financing is an ideal solution for companies that are not yet bankable but have a stable financial condition and a more diverse customer base. Here, the business provides details on all accounts receivable and pledges those assets as collateral. The proceeds of those receivables are sent to a lockbox while the finance company calculates a borrowing base to determine the amount the company can borrow. When the borrower needs money, it makes an advance request and the finance company advances money using a percentage of the accounts receivable.

3. Asset-Based Lending (ABL) – This is a credit facility secured by all of a company’s assets, which may include A/R, equipment and inventory. Unlike with factoring, the business continues to manage and collect its own receivables and submits collateral reports on an ongoing basis to the finance company, which will review and periodically audit the reports.

In addition to providing working capital and enabling owners to maintain business control, alternative financing may provide other benefits as well:

It’s easy to determine the exact cost of financing and obtain an increase.
Professional collateral management can be included depending on the facility type and the lender.
Real-time, online interactive reporting is often available.
It may provide the business with access to more capital.
It’s flexible – financing ebbs and flows with the business’ needs.
It’s important to note that there are some circumstances in which equity is a viable and attractive financing solution. This is especially true in cases of business expansion and acquisition and new product launches – these are capital needs that are not generally well suited to debt financing. However, equity is not usually the appropriate financing solution to solve a working capital problem or help plug a cash-flow gap.

A Precious Commodity

Remember that business equity is a precious commodity that should only be considered under the right circumstances and at the right time. When equity financing is sought, ideally this should be done at a time when the company has good growth prospects and a significant cash need for this growth. Ideally, majority ownership (and thus, absolute control) should remain with the company founder(s).

Alternative financing solutions like factoring, A/R financing and ABL can provide the working capital boost many cash-strapped businesses that don’t qualify for bank financing need – without diluting ownership and possibly giving up business control at an inopportune time for the owner. If and when these companies become bankable later, it’s often an easy transition to a traditional bank line of credit. Your banker may be able to refer you to a commercial finance company that can offer the right type of alternative financing solution for your particular situation.

Taking the time to understand all the different financing options available to your business, and the pros and cons of each, is the best way to make sure you choose the best option for your business. The use of alternative financing can help your company grow without diluting your ownership. After all, it’s your business – shouldn’t you keep as much of it as possible?