inverse ETFs

Prioritise quality companies. If an investor needs to take a defensive stance, it is worth turning to quality stocks, as their robust balance sheets and stable cash flows should insulate them from unforeseen downside risk. With this in mind, many of the largest technology and Internet stocks meet these criteria, while exposure to highly cyclical sectors and companies with excessive leverage should be kept to a minimum. Thus, in order to increase the resilience of your portfolios, you should focus on high quality companies, strong dividend payers and also not forget about regional diversification, as lower valuations and a weaker US dollar can also make global stock markets outside the US attractive.   The general understanding is that the market is likely to come out of the correction this year with expectations of a continued recovery in the second half of the year and a return to a bullish trend. This recovery is expected to help recoup portfolio losses from 2022.   However, there are several factors that pose risks to the market in the near future. These risks include the potential for a bear market, which could be triggered by inflation statistics such as the PCE index and strong labour market conditions. Another risk is the narrow scope of the current rally, where only some sectors have shown growth while others, including cyclical, defensive and growth sectors and assets such as bonds, have remained weak. There is also uncertainty about the timing and severity of a possible recession this year. The market is now looking at the likelihood of a moderate recession, which is already factored into current expectations and prices.   Once there is more clarity on these risk factors, portfolio allocation can be adjusted accordingly, considering both bonds and stocks, with a focus on the second half of the year and recovery of losses incurred in 2022. Two scenarios were considered for such an adjustment:   Scenario No. 1, the positive outlook, sees the market rising and breaking through significant resistance levels of 4200-4300 in the SPX index, which would lead to a rally. In this case, it would be prudent to increase long positions. Risky stocks should be held until they reach the most likely level of local recovery, and then locked in. For positions that still have potential, they should be held. The portfolio as a whole should then be rebalanced, creating a new balanced structure with a 25% allocation to cyclical assets, 35% to growth assets, 10% to protection and 30% to bonds.   Scenario #2, the negative outlook, assumes that the market continues to decline either from the current level or below 4100. In this scenario, protection should be strengthened by using inverse ETFs and reducing long positions (using stop losses) until the target stock is reached. This approach aims to minimise further drawdown until the correction is finally resolved in 2023.   The US stock market has thus experienced a strong recovery since the start of the new year, supported by a resilient technology sector, growth in the semiconductor industry due to AI development, a strong Q1 2023 reporting season, a pause in the Federal Reserve's rate hike, expectations of future rate cuts, lower inflation, a resilient economy, a smooth economic landing and a debt limit increase. While risks are still present, a focus on longer-term investment strategies can help investors benefit from the market's upward trajectory and continued recovery in 2H.  

The pivotal question we aim to answer is who should consider such instruments and who might be better off exploring alternatives. Given the diverse array of tools available for exposure to stock indices, it's worth exploring various options. Let's begin by addressing what a stock index truly is. An index, in itself, isn't a financial instrument, security, or derivative. It's essentially synthetic information about the market or specific segments and slices within it. In simpler terms, a stock index is a collection of components (in our case, listed companies) used to calculate its value. Each index has its portfolio, where each company is responsible for a specific percentage weight. Most indices use weights based on market capitalization – the higher the market value of a component, the greater its percentage value in the index portfolio. Additionally, the liquidity of a given company over a specific period (usually 6 months to a year) is often considered when determining portfolio weights. In essence, an index is like a portfolio comprised of a specific number of listed companies (in our case, not limited to just companies) in specific percentage proportions. Its value and price movements depend on the behavior of the components it holds. Explore more: Mastering Requoting in CFD Trading: Navigating Uncommon Market Scenarios In this segment, we'll focus on prominent stock indices from major exchanges. In the USA, the three key indices are the S&P500, Nasdaq-100, and Dow Jones Industrial Average (US30). In Germany, we have the DAX (DE30), once a favorite among traders; in the UK, it's the FTSE-100; in Japan, the Nikkei-225; and in Poland, the WIG20. Of course, this is just a small glimpse of the market, as each stock exchange has dozens, if not hundreds, of sector-specific, thematic, and smaller company-focused indices. However, leading indices are considered benchmarks for the mood and condition of a given exchange, although not always accurately. Investing in Stock Indices: How to Do It? Since a stock index isn't a financial instrument on its own, is it possible to "buy" it? There are numerous ways to gain exposure to index price movements, with the most popular being the purchase of an Exchange-Traded Fund (ETF) replicating a specific stock index. These ETFs construct their portfolios based on the composition of the underlying index, essentially buying shares of selected companies in the appropriate proportions. By investing in such a fund, we gain exposure to the stocks within the index using a single instrument. ETFs boast several advantages, including relatively low management costs, simplicity, convenience, and often high liquidity. However, standard ETFs are typically medium-term instruments, less suitable for speculation due to the lack of leverage and the ability to only take long positions. Of course, there are also synthetic ETFs in the market with double or even triple leverage, and some with inverse positions (short). On the XTB xStation platform, you'll find ETFs on all major stock indices, including their synthetic, leveraged, and inverse versions. Importantly, these can be purchased without any commission, and if you have a currency account, you won't incur any fees for currency conversion – the only cost is the annual management fee charged by the fund provider. If you prefer not to invest in an entire index through an ETF, you can independently create a portfolio of specific companies in predetermined proportions. On the xStation platform, you won't incur any commission fees for such transactions (up to a monthly turnover of 100,000 EUR). However, this approach is more time-consuming, although it exempts you from management costs charged by ETF providers. For more advanced investors, derivative instruments are available, including futures contracts, structured certificates on the Warsaw Stock Exchange, and, of course, Contracts for Difference (CFD), where stock indices serve as the underlying asset. Derivatives offer financial leverage and the ability to take both long and short positions, but they come with higher risk. CFD Market on Indices: Specification and Trading Conditions CFD contracts on stock indices are now offered by almost every broker, covering primarily popular American indices and leading indices from major global stock exchanges. According to the regulations of the European Securities and Markets Authority (ESMA), CFD contracts on indices provide a maximum leverage of 20:1, meaning a 5% margin requirement. Given the volatility of indices themselves, this is sufficient leverage even for intraday speculation. Depending on the broker, CFDs on some indices may have lower leverage – for instance, with XTB, this is the case for the Italian FTSE ITA40 and Reuters Russia 50 (RUS50), where the leverage is 10:1. Read more: Mastering Forex Markets. A Comprehensive Guide to Navigating Sideways Trends and Consolidation Patterns When holding positions overnight, be prepared for negative swap points, although XTB exempts CFDs on indices (excluding cash versions) from swaps, eliminating additional costs for maintaining positions over time. As for the lot value for CFD contracts on indices, it should ideally be equivalent to the multiplier for futures contracts (which are the underlying instruments for CFDs). However, some brokers may apply a multiple of the multiplier. For the most popular CFD indices, the lot values are: S&P500: multiplier 50 (e-mini) Nasdaq-100: multiplier 20 (e-mini) DAX: multiplier 25 (Mini-DAX) WIG20: multiplier 20 (similar to FW20) In the case of CFDs, you can open a position with a minimal volume of 1 micro lot (1/100 of a lot), allowing you to engage with the market without committing significant capital. Who Should Consider CFD Contracts on Indices? When it comes to CFD contracts on indices, as mentioned earlier, they are certainly not suitable for everyone. Leading stock indices themselves exhibit considerable volatility, and with CFDs, this volatility is further amplified by a maximum leverage of twenty times, introducing significantly higher risk. Therefore, these instruments primarily serve a speculative purpose, typically in the short term. Nevertheless, for those comfortable with the risk and desiring to capitalize on prevailing trends, CFD contracts can serve as a more accessible and considerably lower-capital alternative to index futures. It's crucial, however, to employ risk management measures, such as trailing stop-loss orders, especially given the inherent risks associated with these instruments. CFDs can also present a more accessible and significantly lower-capital alternative to index futures.