In a situation when markets are declining and uncertain, investors generally flock to safe havens like Gold, bonds and cash instruments. Another way to play the downmarket is the use of Inverse Exchange Traded Funds.
What is an Inverse ETF?
An inverse ETF which is also known as ‘Bear ETF’ or ‘Short ETF’ consists of various assets and derivatives, like futures, options and others, and is used to create profits when the underlying index declines in value. Basically, it’s an index ETF that gains value when its correlating index falls.
How does it work?
An Inverse ETF uses derivatives and other methods in order to produce a daily performance that is in the opposite direction of a certain index. Such funds can have a one-to-one correlation with the targeted index, or they can be leveraged. For example, the ProShares Short QQQ (Ticker: PSQ) is designed to match the daily returns of the Nasdaq Composite, just in the opposite direction. On a day when the Nasdaq rises by 3%, this ETF should fall by around same percentage.
Some inverse ETFs are leveraged, and thus designed to magnify the inverse of an index's performance. The ProShares UltraPro Short QQQ (Ticker SQQQ) for instance, is designed to produce returns two times the inverse of the Nasdaq daily performance. In other words, if the Nasdaq drops by 3% tomorrow, this ETF should gain roughly 6%. Below you can find the performance over the last couple of months.
Inverse ETFs use daily rebalancing and thus are best used for short term market timing and hedging strategies rather than a long-term bet. This is because these are actively managed and hence might have higher fees which effect long term performance.
Inverse and Leveraged ETFs can be traded with one of our broker partners. Click here if you would like to open an account.
Inverse and Leveraged ETFs are considered an instrument which involves higher risk and should be dealt with caution. If you like to receive professional advice based on your current financial circumstances, please visit our advisory section here.
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Inverse and Leveraged ETFs are considered a risky instrument and should be dealt with caution. Past performance is not a guide to future results. This information is being provided solely for information purposes and should not be deemed or construed as investment advice, advice concerning particular investments, advice concerning investment decisions, tax or legal advice. Similarly, any views or opinions expressed are not intended and should not be construed as investment, tax and/or legal recommendations or advice. No person should act upon any opinion and/or information in this document without first obtaining professional advice.