For instance, the ProShares Short S&P500 (NYSEArca: SH) and Direxion Daily S&P 500 Bear 1x Shares ETF (NYSEArca: SPDN) take a simple inverse or -100% daily performance of the S&P 500 index. Over the past week, SH rose 1.0% and SPDN added 0.7% while the S&P 500 index declined 0.9%.

Alternatively, for the more aggressive trader, leveraged options include 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. Over the past week, SDS gained 1.7%, SPXS increased 2.4% and SXPU advanced 2.3%.

Potential investors should be aware of the risks associated with these inverse products. These ETFs rebalance on a daily basis, so the inverse funds may not perfectly reflect their intended strategies over long periods due to compounding issues as a result of the daily rebalancing.

RELATED: How Mixing Sector ETF Exposure Can Affect Portfolio Outcome

In Trending markets that move consistently in a single direction, compounding may benefit inverse ETFs. However, in more volatile markets when securities experience greater oscillations, an inverse ETF may underperform its intended -1x, -2x or -3x multiples compared to a benchmark..

Full disclosure: Tom Lydon’s clients own shares of SPY.

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