While it is profitable to accurately time a market rally, investors can also capitalize on bearish turns with inverse exchange traded funds. However, potential investors should still be mindful of the risks. These products only really make sense for traders.
Inverse ETFs try to reflect the daily return that represents going short, or -100%, the underlying index, writes Gregory Zuckerman for the Wall Street Journal. [Inverse and Leveraged]
Additionally, “ultrashort” or “double inverse” ETFs seek to provide twice the inverse, or -200%, the daily performance of the underlying index. This leveraged aspect allows investors the opportunity to multiply their initial investment without buying shares on margin or with borrowed money.
Inverse ETFs will utilize derivatives, like “swaps,” that performs as the targeted market drops or underperforms when the market rallies.
“Similar to options and future contracts, and unlike the stock market, this is a zero-sum game,” Scott Miller Jr., a managing partner of Blue Bell Private Wealth Management LLC., said in the article.
Inverse ETFs allow investors to hedge against falling markets while others may use the funds to aggressively position themselves against the market.
“These should be used by experienced investors to profit from short-term market moves generally made within a day,” Miller added.
Investors should know that inverse and leveraged ETFs typically generate a daily targeted performance as they rebalance daily. As such, these funds will not perfectly reflect the -100% or -200% performance over a long period.
“It can feel good to make money when the market is going down,” Matthew Tuttle, president of Tuttle Wealth Management LLC, said in the article. “But these ETFs are meant to be short-term trades.”
For more information on inverse ETFs, visit our inverse ETFs category.
Max Chen contributed to this article.