Exchange-traded funds (ETFs) that generate returns that are inverse to their underlying indices are called inverse ETFs. To do this, inverse ETFs use derivative securities, such as swap agreements, futures or options.
Inverse ETFs are used by speculative traders and investors seeking day trades against underlying indices. For example, an inverse ETF that tracks the S&P 500 will decline 1% when the S&P gains 1%.
The best inverse ETFs
Investing in an inverse ETF can be very beneficial. However, all investments have advantages and disadvantages. To get the maximum exposure in this market, choosing the right inverse ETF is crucial. Accordingly, a list of some of the best inverse ETFs can be found below.
Core Materials ProShares UltraShort (NYSEARCA: SMN)
This ETF corresponds to twice the daily inverse performance of the Dow Jones US Basic Materials Index. The fund invests in financial instruments which, in the opinion of ProShare, should generate daily returns consistent with the objectives of the investment strategy.
The ETF’s current net expense ratio is 0.95% and Michael Neches manages the fund. He has net assets worth a total of $8.23 million.
Direxion Daily S&P 500 Bear 1X Stocks (NYSEARCA: SPDN)
The SPDN ETF targets daily investment results, before fees and expenses, of 100% of the inverse performance of the S&P 500 Index.
The fund generally invests in futures, swap agreements, short positions and other financial instruments that provide short exposure to the index equivalent to at least 80% of the fund’s net assets.
The fund’s net expense ratio for investors is 0.49%. He has $581.79 million in assets. Paul Brigandi manages the fund.
The S&P has recorded considerable losses this year. As a result, SPDN largely benefited from its slowdown.
ProShares Ultrashort Semiconductors (NYSEARCA: SSG)
If you want to bet against the semiconductor industry, this fund may be for you. With total assets of $15.4 million, this investment is twice the inverse of the daily performance of the Dow Jones US Semiconductors Index.
The index measures the performance of stocks of US companies in the semiconductor sector, an industry essential to the components of electronic devices.
This year, the fund has produced a strong return, but comes with a huge expense ratio of 0.95%. Among its main holdings are the Dj US Semiconductors Index Swap Morgan Stanley & Co. International Plc and the Dj US Semiconductors Index Swap Societe Generale.
AXS TSLA Daily Bear ETF (NASDAQ: TSLQ)
Tesla has produced incredible returns over the past few years, but not everyone is bullish on the company. And if you’re skeptical of Tesla’s significant run, then the AXS TSLA Bear Daily ETF is perfect for you.
The investment fund is the inverse of Tesla’s performance. The fund maintains an exposure of at least 80% to financial instruments that provide inverse exposure to Tesla.
The fund has made gains of 30% in the past month, but comes with a net expense ratio of 1.15% for investors. The fund is managed by Matthew Tuttle and Parker Binion.
Direxion Daily Financial Bear 3X Stock (NYSEARCA: FAZ)
The Direxion Daily Financial Bear 3X Shares is an investment that targets results that are 300% inverse to the Financials Select Sector Index. Therefore, an investment in this fund would be a bet against some of the largest US financial companies represented by the S&P 500.
The fund holds assets of $213.78 million, consisting of Dreyfus Government Secs Cash Mgmt Admin and Goldman Sachs FS Treasury Intms Instl, to name two.
Due to the market’s exposure to a volatile macroeconomic environment, the investment generated a positive return this year. The fund imposes a cost ratio of 1.01% on investors.
What is a reverse ETF?
An inverse ETF is a fund designed to profit from a decline in an underlying index that it tracks. Investing in inverse ETFs is comparable to opening short bets on various stocks.
Inverse ETFs use derivatives such as futures contracts to bet on the direction of an asset’s price.
Inverse ETFs are not long-term investments since the fund manager is constantly buying and selling derivative contracts. Therefore, there can be no assurance that the performance of the Inverse ETF will be comparable to that of an index.
They must be actively managed to buy financial instruments; these high costs are distributed to investors and charged as an expense ratio.
Since its returns are based on the daily change in the value of an underlying index, it is best used as a short-term investment strategy.
Benefits of Inverted ETFs
Investors can derive various benefits from investing in inverse ETFs, such as an increased amount of investment or trading opportunities. Some of the benefits are shown below.
More opportunities: The ability to profit when the stock market is down is one of the main advantages of inverse ETFs. This feature can help protect your portfolio and cover any losses on your investments. In tough times like this year, investors can make a profit.
Reduced risk: If you are an investor with long-term bullish positions, this is a great way to hedge your positions. Announcements such as earnings, US data or monetary policies could jeopardize your position. These funds can reduce risk and help you break even.
Limit losses: Your losses are limited as opposed to when you short sell a stock or an ETF. The risk is high if you choose to sell an asset short, as the losses you could incur are unlimited. An inverse ETF, however, limits your losses to the amount you have invested.
Considerations with Inverted ETFs
Derivative risks: Inverse ETFs provide exposure using derivatives. However, derivative investments are considered aggressive strategies and expose traders to credit and liquidity risks.
Costs: The costs of inverse ETFs can be significantly higher than those of shorting a stock. Fees, transaction costs and the investment strategies used by the fund explain the increase in expense ratios.
Market bias: Ultimately, the market has a positive long-term tilt. Stocks often fare better than other asset groups. Therefore, placing a bet against the stock market involves a high degree of risk.
Compare ETF brokers
The ETF market offers several investment opportunities to individuals; however, investors must be set up with a broker to take advantage of the potential profits available. Many brokers offer different asset classes to trade, but finding a broker that offers inverse ETFs can be more difficult. Below is a list of potential brokers you can turn to for inverse ETFs.
Claim exclusive offers
Intermediate Traders and Investors
Active and global traders
Refer friends and get FREE stock
Get up to $2,500 bonus cash
Frequently Asked Questions
questions and answers
Are Inverse ETFs Worth It?
Reverse ETFs are worth it if used correctly. However, their construction carries unique risks that investors should be aware of before investing. Some of these risks are listed in the article.
No, QQQ is not a reverse ETF. Instead, the QQQ tracks the Nasdaq 100 index, and much like the Nasdaq 100, it’s heavily weighted toward large-cap tech companies.