“These products have been popular with investors because the ETF provider handles the complexities of managing the short exposure. Also, unlike other shorting methods, leveraged and inverse ETFs can be purchased in many tax-sheltered accounts,” the Morningstar analyst said. “The upside to this downside exposure is that, when buying an inverse ETF, you cannot lose more than your initial investment. Conversely, shorting a security has theoretically unlimited potential losses.”
Strauts cautions that inverse ETFs aren’t designed as long-term holdings.
“Because of the compounding arithmetic of constantly resetting the exposure to negative 100% of the daily return, investors are not guaranteed to get the index’s inverse return for any holding period longer than one day. To counteract the effects of daily leverage reset, inverse ETFs need to be rebalanced regularly,” he said. “Managing an inverse ETF is definitely not a set it and forget it transaction.”
Short ETFs have been pushed lower recently on the stock rally.
ProShares Short S&P 500
