Michael Burry’s New ‘Big Short’ Bet Should Inspire ETF Investors

Michael Burry’s New ‘Big Short’ Bet Should Inspire ETF Investors

Profiting in bear markets is not just for hedge funds.

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Reviewed by: Sean Allocca
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Edited by: Lisa Barr

The quarterly deadline for hedge funds to publicly release a summary of activity for the previous quarter raised eyebrows in the case of Scion Capital, the fund run by Michael Burry.  

He is the investor portrayed by actor Christian Bale in the movie “The Big Short,” and from the looks of it, he’s now pursuing an even bigger short. 

A review of his fund's filing shows that about 95% of his fund is invested in put options on the S&P 500 and the Nasdaq-100. Burry’s portfolio is so heavily dominated by those two put option positions that it essentially renders the rest of his portfolio irrelevant.  

This is a huge bet. The report documents what the fund did during the second quarter. That means it is at least possible that those put positions don’t look much or at all like they did six weeks ago when the report was filed.  

Given the attention surrounding this news, there are likely many investors who use financial advisors now asking this question: If the “Big Short” guy is positioned like that, and he’s right again, my stock portfolio could get wiped out like it did from 2007-2009 (when the S&P 500 and Nasdaq lost more than 50% of their value in 18 months); what can be done about that? 

This is where the development of the ETF industry since the global financial crisis is a game-changer for financial advisors and self-directed investors. Fifteen years ago, when a stock bear market hit, there were a small number of ETFs to profit from down markets, and those products were new and not widely used.  

Michael Burry’s Big Bets 

Today, investors can more earnestly attempt to profit from steep market declines, and without betting as big as Michael Burry is. Put options can be bought and sold by any investor who gets approved by their brokerage custodian. But ETFs represent transparent, liquid ways to pursue the same broad objective.  

Using the etf.com ETF Screener, I filtered down to 30 ETFs that are built to profit from declines in an index, group of stocks bonds, or even a single security.  

For instance, if one wanted to follow Burry’s lead, there are two ETFs that daily aim to perform exactly opposite the S&P 500 index: the $1.7 billion ProShares Short S&P 500 ETF (SH) and the $322 million Direxion Daily S&P 500 Bear 1X Shares ETF (SPDN).  

Meanwhile, the ProShares Short QQQ (PSQ), a $944.8 million fund, targets the opposite return of the Nasdaq-100 Index. After a 40% run-up in the index so far in 2023, trying to profit from a reversal, or at least hedge existing market exposure, is not the wildest idea. It certainly isn’t to Burry, who spotted major issues in the subprime mortgage market, and ultimately cashed in profits of a size legendary enough to create an eclectic movie around.  

The real takeaway for financial advisors and investors is that after 15 years of easy-money policies and a strong stock market, a bit of attitude adjustment is something to consider; specifically, stop looking at the stock market as something to root for.  

If it goes up, ETFs offer thousands of ways to try to profit, short term and long term. If it goes down, there are plenty that try to make money from that.  

Or it might mean simply accepting the gift of 5% T-bill yields for more of a portfolio than in the past 15 years. After all, that opportunity was not available until the Fed raised rates by 5.25% in about a year and a half.  

So, for investors who agree with Michael Burry’s assumed bearish market outlook, ETFs offer a set of choices for advisors to construct client portfolios.  

Note: Corrects 10th paragraph description of Invesco QQQ Trust, noting that it targets the return of the Nasdaq-100 index. The previous version of this story said it targets the opposite return of the index.

Rob Isbitts' Wall Street career spans 5 decades and multiple roles, all dedicated to providing clarity to investors by busting classic myths and providing uncommon perspective. He did so as a fiduciary investment advisor, Chief Investment Officer and fund manager for 27 years before selling his practice in 2020. His efforts now focus exclusively on investment research, education and multimedia. He started ETFYourself and SungardenInvestment to provide straightforward commentary and access to his investment intellectual property for portfolio construction, stocks and ETFs. Originally from New Jersey, Rob and his wife Dana have 3 adult children and have lived in Weston, Florida for more than 25 years.