After a year of wild market swings, the average investor is taking a more conservative approach. With exchange traded funds, investors can maintain market exposure while hedging against potential downsides.
Inverse and leveraged ETF products are an easy way to maintain quick and profitable positions, writes Andrés Cardenal for The Motely Fool, but many investors do not fully understand the investments. [Trading Inverse and Leveraged ETFs]
For instance, a “short” ETF will move in the inverse direction of the underlying index. That is, the ETF will rise by the same amount the underlying index falls, or vice versa. However, these types of ETFs are intended to mimic daily performances, and longer time frames will result in varying performances.
Leveraged inverse ETFs try to provide 2x or 3x the daily performance of a benchmark index. Again, these are intended as short-term holdings, as compounding issues will result in diverging performances to the index over the long-run.
If investors are wary about such investment products, there are other options available.