The reality is that they did what they were supposed to do but what they were supposed to do did not line up with investor perceptions. Inverse index funds seek to deliver an exposure today not over some longer period of time. If the S&P 500 goes down 1% today than a 2x inverse fund will go up 2% today and that has been reliable.
This has led some to conclude that these funds cannot meet their objective over longer periods of time but that isn’t quite right. The reality is that whether or not these funds meet the imprecise expectation of delivering 1x, 2x or 3x over longer periods of time depends on the combination of up and down days and the size of the moves in that time period which of course is unknowable.
The history of these funds is that sometimes they do “work” over longer periods of time and sometimes they have not and whenever the next bear market comes there is no way to know whether an inverse index fund will do what clients hope or not.
Advisors wishing to avoid this issue can consider funds offering short exposure that avoids the daily objective issue which we will cover in a future post.
This article was written by AdvisorShares ETF Strategist Roger Nusbaum.