At a time when some investors are trying to get creative with portfolio management while reducing overall risk, leveraged and inverse exchange traded funds (ETFs) might be the right answer if you understand them.
Leveraged and inverse ETFs aim to have the funds’ movements correspond to the inverse of the relevant market indicator on a daily basis. One must keep in mind that these ETFs come with risks, as well. The biggest issue to understand is the meaning of the word “daily” when it comes to these ETFs: daily, they will track their benchmarks. The further out an investor gets, the greater the risk that the fund won’t track its benchmark perfectly. This effect is heightened in volatile markets. (Check out our special report on these investment tools).
There are a growing number of providers of such ETFs today, including Direxion, ProShares and Rydex.
These funds can be appealing to investors with the risk appetite for several reasons:
- They can be used as a hedge if an investor believes the market is due for a short-term correction. If an investor is holding a position, but doesn’t necessarily want to sell it, then a leveraged or inverse ETF can be used to hedge against any potential loss.
- They can be used to capitalize on market movements. If an investor believes that the S&P 500 is due for a nice run, a leveraged ETF to maximize this movement might be just what the investor wants. (How leveraged ETFs are misunderstood).
These funds aren’t for everyone – always be fully aware of the risks and know how they work before you invest.
For more on leveraged and inverse ETFs, visit our leveraged ETFs category.
Some examples of common inverse and leveraged ETFs are:
- ProShares Short S&P 500 (SH), which seeks to give 100% of the inverse daily performance of the S&P 500.
- ProShares Ultra S&P 500 (SSO), which seeks to give 200% of the daily performance of the S&P 500.
- Emerging Markets Bear 3x Shares (EDZ), seeks to give 300% of the inverse daily performance of the MSCI Emerging Markets Index
- Technology Bull 3x Shares (TYH), seeks to give 300% of the daily performance of the Russell 1000 Technology Index
- Rydex 2x Russell 2000 (NYSEArca: RRY), seeks to give 200% of the daily performance of the Russell 2000 Index
- Rydex Inverse 2x S&P MidCap 400 (NYSEArca: RMS), seeks to give 200% of the inverse daily performance of the Mid Cap 400 Index
Kevin Grewal contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. 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.