ETF Trends
ETF Trends

For many exchange traded funds (ETF) designed to go up when its underlying index goes up, you can often find a corresponding ETF designed to go up when the underlying index heads south.

They’re known as "inverse" ETFs, and as David Gonzalez at Investopedia reports, they’re just one more tool in the ETF workshop that help investors hedge risk and keep their portfolios afloat when the markets take a stumble. For example, if you felt that the S&P was going to go down, you would get the ProShares Short S&P 500 (SH). Likewise, you wouldn’t want a short ETF in a sector that’s heading upward.

Going a step further, there are some inverse ETFs that seek to double the performance of an index (a clue is if "ultra" appears in the name). These double ETFs either double the performance or move in twice the inverse direction of their benchmark.

Unlike regular long ETFs, the investment capital held in the legal trust underlying each inverse ETF generally is not invested directly in the securities of the index’s constituents.

Most importantly, Gonzalez stresses the risks of inverse ETFs. The potential to lose and lose big is still there, so an investor should always make the most informed decision possible.

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.