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.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.