For instance, if an investor believes the markets will pullback over the short-term, one could sell off his or her full equity position and potentially trigger tax consequences and incur transaction costs. Alternatively, an investor can add an inverse S&P 500 ETF to hedge the portfolio and help diminish the volatility of the combined portfolio.
For the more risk-tolerant speculators, inverse ETFs can be used to directly profit off the miseries of the markets as the inverse options are used for bets on market turns. While traders have been capitalizing off market turns through short selling options, ETFs provide an easy-to-use alternative to get in an out of a short position, and the funds only exposes a trader to potential losses up to the purchase amount, whereas short sales can expose a trader to unlimited losses.
More aggressive traders can also leverage their bearish outlook with the ProShares UltraShort S&P500 ETF (NYSEArca: SDS), which tries to reflect the -2x or -200% daily performance of the S&P 500, the Direxion Daily S&P 500 Bear 3x Shares (NYSEArca: SPXS), which takes the -3x or -300% daily performance of the S&P 500, and ProShares UltraPro Short S&P 500 ETF (NYSEArca: SPXU), which also takes the -300% daily performance of the S&P 500. However, while the leveraged options provide potentially greater returns, these ETFs also come with greater risks. [Inverse S&P 500 ETF Ideas to Hedge a Correction]
For more information on inverse strategies, visit our inverse ETFs category.
Max Chen contributed to this article.