Inverse or bearish exchange traded funds have seen huge growth within the investment industry. These funds are intended to move opposite the underlying index or sector they track. Some return two or three times the negative performance of the index or sector they are attached to.
“While it may be tempting to use a leveraged or inverse ETF to capitalize on an investing idea or as a hedge, investors would probably be better served by using unleveraged products or adjusting their asset allocation,” Michael Rawson wrote in an analyst report for Morningstar.
Leveraged ETFs can be a useful tool for traders looking for more bang for their buck. They can put on positions with less capital, for example. [Special Report: Leveraged and Inverse ETFs]
The leveraged funds tend to diverge from long term expectations, which makes them unsuitable as buy-and-hold tools generally. The goal of most leveraged ETFs is to return twice the underlying index on a daily basis, leading to less emphasis on the products long term performance accuracy, reports Investopedia.