Leveraged and inverse ETFs are a relatively small but growing portion of the overall business. These specialized funds that magnify market returns and profit from market declines are designed for traders rather than buy-and-hold investors.
“Successfully betting on market downturns is very difficult, and even the most intrepid investors find it difficult to consistently execute an effective shorting strategy. Stock prices tend to rise over time, so shorting should be done only tactically and for a short period of time, if at all,” says Morningstar analyst Timothy Strauts in a primer on inverse ETFs that let investors short the market.
Short ETFs can be used to bet on market downturns or to hedge.
“The simplest and easiest way to get short exposure is to buy an inverse ETF. There are currently 244 leveraged and inverse products with $28.8 billion in assets,” Strauts wrote.
The biggest leveraged inverse ETF is ProShares UltraShort S&P 500 (NYSEArca: SDS). It seeks 200% of the opposite return of the S&P 500, after fees and taxes. [Bear ETFs: Leveraged Funds That Short the S&P 500]
ProShares Short S&P 500 (NYSEArca: SH) is an unleveraged ETF that shorts the market.