Inverse exchange-traded fund
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An Inverse exchange-traded fund is an exchange-traded fund (ETF), traded on a public stock market, which is designed to perform as the inverse of whatever index or benchmark it is designed to track. These funds work by using short selling, trading derivatives such as futures contracts, and other "leveraged" investment techniques.
By providing performance opposite to their benchmark, inverse ETFs give approximately the same results as would shorting the stocks in the index. An inverse S&P 500 ETF, for example, seeks a daily percentage movement opposite that of the S&P. If the S&P 500 rises by 1%, the inverse ETF is designed to fall by 1%; and if the S&P falls by 1%, the inverse ETF should rise by 1%. Because their value rises in a declining market environment, they are popular investments in bear markets.[1]
Short sales have the potential to expose an investor to unlimited losses, whether or not the sale involves a stock or ETF. An inverse ETF, on the other hand, provides many of the same benefits as shorting, yet it exposes an investor only to the loss of the purchase price. Another advantage of inverse ETFs is that they may be held in IRA accounts, while short sales are not permitted in these accounts.
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[edit] Strategies for buy-and-hold investors
There are a numbers of scenarios where a long-term investor could benefit from short or inverse ETFs. Investors trapped in a long position during a prolonged bear market might want to reduce their losses by using a short or inverse ETF. Another instance might be where a long-term investor has a large paper gain but doesn't want to pay taxes. Rather than watch a market decline eat away at the value of the investor's portfolio, selling short a market-tracking ETF, or purchasing an inverse or short ETF would help reduce losses.
[edit] Fees and other issues
Inverse and leveraged inverse ETFs tend to have higher expense ratios than standard index ETFs, since the funds are by their nature actively managed; these costs can eat away at performance. Since the market has a long-term upward bias, profit-making opportunities are limited in long time spans. In addition, a flat or rising market means these funds might struggle to make money. Inverse ETFs are designed to be used for relatively short-term investing as part of a market timing strategy.[2]
[edit] List of funds
Some inverse ETFs are:
ProShares
- ProShares Short Dow 30 - AMEX: DOG
- ProShares Short S&P 500 - AMEX: SH
- ProShares Short S&P MidCap 400 - AMEX: MYY
- ProShares Short S&P SmallCap 600 - AMEX: SBB
- ProShares Short Nasdaq 100 - AMEX: PSQ
- ProShares Short Russell 2000 - AMEX: RWM
Horizons BetaPro
- HBP S&P/TSX 60 Bear Plus ETF - TSX: HXD
- HBP S&P/TSX Capped Energy Bear Plus ETF - TSX: HED
- HBP S&P/TSX Capped Financials Bear Plus ETF - TSX: HFD
- HBP S&P/TSX Global Gold Bear Plus ETF - TSX: HGD
- HBP S&P/TSX Global Mining ETF - TSX: HMD
- HBP NYMEX Crude Oil Bear Plus ETF - TSX: HOD
- HBP NYMEX Natural Gas Bear Plus ETF - TSX: HND
- HBP COMEX Gold Bullion Bear Plus ETF - TSX: HBD
- HBP DJ-AIG Agricultural Grains Bear Plus ETF - TSX: HAD
