Inverse and Leveraged ETFs Go Mainstream

  Inverse and leveraged exchange traded funds (ETFs) have gained the spotlight this year amid the market volatility, as they’re designed to appreciate in value when the index they track loses money. Some of these use leverage which can either double your profit or give a corresponding loss. Rydex  and Profunds are two firms that specialize in this type of ETF. Bill Donoghue for MarketWatch reports that Profunds actually introduced their ETFs before last spring’s market correction and has recently added the first foreign stock inverse and leveraged funds.

Why are these ETFs getting all the attention lately? A few reasons:

1. Investors are finding creative new applications for ETFs.
2. Institutional investors who are restricted from investing on margin or selling stocks short can invest in inverse or leveraged ETFs.
3. There is a lack of competition from other fund families. Only the two aforementioned providers offer them.
4. Mutual funds are monetizing cash positions by investing late in the day to get closer to fully-invested but liquid positions to expedite redemptions.

Inverse ETFs include:

• Rydex Inverse 2x S&P 500 (RSW)
• Rydex 2x S&P 500 ETF (RSU)

Read the disclosure, as Tom Lydon is a member of the board of Rydex Investments.