Short, or inverse exchange traded funds (ETFs) have been a great boon to investors and have been greeted with a lot of excitement. But are you fully educated?

Short, inverse or leveraged exposure has gotten easier for investors to achieve because the short or inverse ETFs take the game of both wagering against stocks as well as hedging long positions to another level entirely.

The providers of these funds have done a tremendous job of educating investors about how (and how not) to use them. We’re so far into the education at this point that it’s buyer beware – are you buying these funds without really understanding these points? If so, you could wind up hurting your portfolio. Never buy something you don’t understand.

David Penn for Associated Press explains that the average retail trader to speculate on the decline of financial stocks, for example, or to protect investments in technology stocks through a short or inverse technology ETF, and a whole world of trading and investing has been opened.

Here are a few facts about these special ETFs:

  • A short or inverse ETF is a fund that tracks the opposite of its underlying benchmark. Inverse, or short ETFs use a variety of derivative products in order to achieve their inverse performance. These derivatives can include futures, options, swaps or other instruments and often use leverage to achieve the ETFs’ goals.
  • The funds reset daily, making them poor candidates for a buy-and-hold strategy. These ETFs are meant for daily use, and the providers have been clear on this.
  • Speculating and hedging remain two of the best ways for the average trader to take advantage of short and inverse ETFs. Traders use short or leveraged ETFs to speculate on the likelihood of markets moving in a specific direction (that is, up or down) without having to either sell ETFs short or entering the options market. Leveraged and short ETFs also allow investors to stay in current positions through out volatility.

Do you use short and leveraged ETFs? Talk about them in our forum and share your experiences.

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.

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