On the Flip Side: Inverse (Short) ETFs
July 3rd at 1:03am by Tom Lydon
An inverse, or "short", exchange traded fund (ETF) provides the opposite performance of the benchmark it tracks. For example, if the S&P 500 rises 1%, then the inverse ETF should fall by 1%; if the S&P 500 falls 1% than the inverse ETF will rise 1%.
A leveraged inverse ETF seeks to provide a multiple of the opposite performance to the benchmark. So if the S&P 500 rises 1%, the leveraged inverse ETF should fall 2%, and so on.
Seeking Alpha provides a current list of inverse ETFs, as well as explain some of their characteristics. Inverse and inverse-leveraged ETFs have tax advantages over shorting stocks but they do carry higher expense ratios than standard index ETFs. Some reasons to short an index include:
- A long-term investor believes the market will fall, and wants protection during a market decline;
- A long-term investor believes the market will fall and has a large unrealized capital gain they don’t want to realize;
- A short-term trader wants to make a bearish bet on the market.
