Leveraged and inverse exchange traded funds have taken their fair share of abuse in the press lately, but the high-octane financial products fill a legitimate need for short-term traders, and they can also be used to hedge.
Leveraged products are always the largest percentage movers during the day, which emphasizes their volatility. The ETFs are doing what they’re designed to do.
The basics: These volatile funds can reset their leverage on a daily or monthly basis. They can magnify the market’s performance by 200% or 300%, in either direction – inverse or “bearish” exchange traded products profit when the tracking index declines. [Primer on Leveraged and Inverse ETFs]
Leveraged and inverse ETFs deliver their strategies by investing in derivatives, which introduces counterparty risk. [Call for More Disclosure, Transparency in ETFs]
ETFs that short U.S. large-cap stocks include ProShares UltraShort S&P 500 (NYSEArca: SDS), ProShares Short S&P 500 (NYSEArca: SH), ProShares UltraShort Dow 30 (NYSEArca: DXD), Direxion Large Cap Bear 3x Shares (NYSEArca: BGZ) and Rydex Inverse 2x S&P 500 ETF (NYSEArca: RSW).