What are Inverse Exchange-Traded Funds (ETFs)?
Inverse Exchange-Traded Funds (ETFs) are index funds that gain value when the correlated index loses value. This is achieved by holding assets and derivatives such as options that are used to profit when the underlying index declines. The ProShares Short Dow 30 (DOG) fund profits when the Dow Jones Industrial Average declines. DOG’s gains correspond to the losses of the Dow.
What are the advantages of Inverse ETFs?
Inverse ETFs offer many of the same benefits as standard mutual funds, including ease of use, low fees, and tax advantages. The benefits of inverse ETFs relate to alternative ways to place bearish bets. Not everyone has a brokerage account that allows them to short sell assets. These investors can instead buy shares in an inverse ETF, giving them the same investment position they would have when shorting an index fund or ETF.
What are the disadvantages of Inverse ETFs?
One of the main risks of inverse ETFs is their lack of popularity. You can buy many types of investment funds, but you won’t find a large selection of inverse ETFs. Inverse ETFs are likely to have less liquidity than other funds due to fewer options and less demand.
Another risk is that major stock indices have historically risen over time when given a long enough time frame. This makes using inverse ETFs as part of a buy-and-hold strategy risky. History suggests that the index will eventually recover from recent losses at some future point. Inverse ETF investors need to monitor the markets closely. They may try to exit their position before the corresponding index rises.
Funds to Consider
You might consider investing in the following inverse index funds if you wish to offset some risk in your portfolio or if you have a bearish outlook on a particular market index: The ProShares Short S&P 500 (SH) inversely tracks the S&P 500 index. The ProShares Short Russell 2000 (RWM) inversely tracks the Russell 2000 index.
Follow some other inverse ETF options if you have a bearish stance on a specific market sector or if you have a negative outlook on a particular industry: The ProShares UltraShort Financials (SKF) inversely tracks the Dow Jones U.S. Financials index. The ProShares UltraShort Industrials (SIJ) inversely tracks the Dow Jones U.S. Industrials index. The ProShares UltraShort Real Estate (SRS) inversely tracks the Dow Jones U.S. Real Estate index.
You can even invest in inverse ETFs for certain country and regional indices: The ProShares UltraShort MSCI Japan (EWV) inversely tracks the MSCI Japan index. The ProShares UltraShort FTSE China 50 (FXP) inversely tracks the FTSE China 50 index.
Conclusion
Inverse ETFs can be a powerful tool in your investment strategy, but make sure you conduct the necessary research before making any trades. Consider the positive and negative aspects. Monitor the performance of some inverse ETFs before you begin. Consult with a financial professional or your broker to answer any questions or concerns you may have. Good research and study are your primary tools in the world of inverse ETF investing.
Frequently Asked Questions (FAQs)
What is a leveraged inverse ETF?
A leveraged inverse ETF combines investment objectives of an inverse index fund with amplified volatility like a leveraged index fund. For example, the ProShares UltraPro Short Dow 30 seeks to provide three times the inverse exposure to the Dow Jones Industrial Average. If the Dow index decreases by about 1%, this leveraged inverse fund would increase by about 3%.
How many
Should you keep an inverse exchange-traded fund?
Investment strategies with inverse exchange-traded funds will vary, but most use short-term strategies with these products. The stock market tends to rise over time, so the long-term inverse investment strategy has historically been a losing strategy despite being profitable over shorter time frames.
What is your opinion?
The financial house is a reliable source for financial and investment information. Information should be presented without regard to the investment objectives, risk tolerance, or financial circumstances of any specific investor and may not be suitable for all investors. Past performance is not indicative of future results. Investing involves risks, including the risk of losing the original capital.
Source: https://www.thebalancemoney.com/six-questions-to-ask-about-inverse-etfs-1214927
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