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10 inverse ETFs for bearish investors

Bearish ETFs can make you money when stocks go down, but investing in inverse ETFs takes careful strategizing and carries extra risk.

Inverse ETFs are exchange-traded funds designed to move in the opposite direction of an index. So an inverse, or bearish, ETF that bets against the S&P 500 will go up when the S&P 500 goes down.

Investing in inverse ETFs can be a good way to hedge your portfolio against market downturns. But profiting from these ETFs takes careful due diligence.

Inverse ETFs are also called short ETFs.

These 10 ETFs track inversely to the market

These are the top inverse ETFs as of June 2021, according to the ETF Database. Many of these ETFs have experienced negative year-over-year returns, which could be due to the relatively strong recent performance of the Canadian stock market. But these are known to have stronger returns in the short term. To trade ETFs, you’ll need a brokerage account.

ProShares UltraPro Short QQQ

  • Ticker: SQQQ
  • YTD return: -28.39%
  • Assets under management: $1.84 Billion
  • Expense ratio: 0.95%

This ETF is designed to move in the opposite direction of the Nasdaq-100 Index. It offers 3X daily short leverage on nonfinancial equities like US Treasury Bills, so this ETF is best for investors with a high risk tolerance who aren’t looking to hold onto stocks for the long run.

ProShares Short S&P 500

  • Ticker: SH
  • 1-year return: -12.85%
  • Assets under management: $1.40 Billion
  • Expense ratio: 0.90%

Designed to perform in the opposite direction of the S&P 500, this ETF can be useful during bear markets. Results are delivered over a single trading session, with exposure resetting every month. The ProShares Short S&P500 might be suitable for investors who want to bet against large cap US equities and who don’t plan to hold their stocks in the long run.

ProShares Short QQQ

  • Ticker: PSQ
  • 1-year return: -8.95%
  • Assets under management: $592.62 Million
  • Expense ratio: 0.95%

This ETF tracks the 100 largest nonfinancial securities on the Nasdaq. Results are delivered over a single trading session, with exposure resetting every month. The PSQ may be suitable for short-term investors who want to hedge against their Nasdaq investments or bet against top Nasdaq nonfinancial stocks.

ProShares UltraShort S&P 500

  • Ticker: SDS
  • 1-year return: -24.46%
  • Assets under management: $587.52 Million
  • Expense ratio: 0.91%

This ETF is designed to move in the opposite direction of the S&P 500 Index. It offers 2X daily short leverage on large-cap US equities like US Treasury Bills. Leverage resets every day. This ETF is best for investors with a high risk tolerance who aren’t looking to hold onto stocks for the long run.

ProShares UltraPro Short S&P 500

  • Ticker: SPXU
  • 1-year return: -35.14%
  • Assets under management: $468.58 Million
  • Expense ratio: 0.93%

This ETF is designed to move in the opposite direction of the S&P 500 Index. It offers 3X daily short leverage on large-cap equities. Leverage resets every day. This ETF is best for investors with a high risk tolerance who aren’t looking to hold onto stocks for the long run.

Direxion Daily S&P 500 Bear 3X Shares

  • Ticker: SPXS
  • 1-year return: -35.06%
  • Assets under management: $388.06 Million
  • Expense ratio: 1.07%

This is another ETF designed to generate performance opposite to the S&P 500, which contains some of the biggest blue-chip companies in America. Investors could potentially use this ETF to hedge against existing S&P 500 investments or to bet against large-cap, blue chip companies in the US.

ProShares UltraPro Short Dow 30

  • Ticker: SDOW
  • 1-year return: -36.43%
  • Assets under management: $356.66 Million
  • Expense ratio: 0.95%

This ETF is designed to move in the opposite direction of the Dow Jones Industrial Average. It offers 3X daily short leverage on large-cap US equities. Leverage resets every day. This ETF is best for investors with a high risk tolerance who aren’t looking to hold onto stocks for the long run.

Direxion Daily Small Cap Bear 3X Shares

  • Ticker: TZA
  • 1-year return: -45.49%
  • Assets under management: $351.39 Million
  • Expense ratio: 1.07%

This ETF is designed to move in the opposite direction of the Russell 2000 Index. It offers 3X daily short leverage on small-cap equities. Leverage resets every day. This ETF is best for investors with a high risk tolerance who aren’t looking to hold onto stocks for the long run.

ProShares Short Russell 2000

  • Ticker: RWM
  • 1-year return: -16.48%
  • Assets under management: $259.35 Million
  • Expense ratio: 0.95%

This ETF tracks an index of small-cap US equities that are also tracked by the Russell. Results are delivered over a single trading session, with exposure resetting every month. The RWM may be suitable for short-term investors who want to hedge against existing investments or bet against small-cap US stocks.

ProShares Short Dow 30

  • Ticker: DOG
  • 1-year return: -13.60%
  • Assets under management: $232.26 Million
  • Expense ratio: 0.95%

This ETF aims to move in the opposite direction of an index that invests in American blue chip companies, particularly the Dow Jones Industrial Average. So it may produce strong returns when major American companies in that index experience losses in share price.

However, the index has in recent times been experiencing an overall gain and recently broke records. So it may be best to monitor this ETF closely before jumping in.

What is an inverse ETF?

An inverse ETF is an exchange-traded fund (ETF) built with derivatives such as futures contracts. These ETFs aim to generate a daily performance that moves in the opposite direction of a given index. But you can buy and sell shares through a brokerage account just like you would with any traditional ETF.

There are 2 main types of inverse ETFs.

  • One-to-one correlation: These inverse ETFs are designed to move in the exact opposite direction of a particular index each day. So if the S&P 500 goes down 3% today, an inverse ETF betting against it would go up 3%.
  • Leveraged ETFs: These inverse ETFs are designed to produce daily returns that multiply the performance of a given index in the opposite direction. Leveraged ETFs typically have a multiplying factor such as three times (3X) in their names. If the S&P 500 goes down 3%, a leveraged 3X ETF betting against it would go up 9% (3 x 3).

Investing in an inverse ETF

Inverse ETFs are designed to be short-term investments; professional often use them to hedge their long positions, limiting their losses if the market goes down instead of up. You may consider investing in an inverse ETF if you’re an experienced day trader. An inverse ETF is rebalanced every day to keep a correlation to a given index.

You should have a strong knowledge of a particular index and the time to analyze it daily before investing in a bearish ETF that aims to profit from its decline. Over time indexes do tend to go up so, like shorting individual stocks, trying to pick one that will go down is risky.

In other words, you should have enough data and investment acumen under your belt to justify your prediction that a given index will go down in a particular time frame. If the opposite ends up happening, you’ll lose money.

Advantages of an inverse ETF

Inverse ETFs are also called short ETFs because investing in these ETFs is similar to holding various short positions. But unlike with shorting a stock, you don’t need to borrow shares.

Shorting stocks is an advanced trading strategy that involves borrowing shares from a broker and selling the stocks immediately. The rationale here is that if the stock price falls sharply as you predict, you can buy them back at much cheaper prices and return them to your broker while keeping the difference.

Shorting a stock involves a lot of risk because if the stock price goes up, you’ll need to buy back shares to return to the brokerage for more than you sold them for. And because there’s no limit to how high a stock can go, dropping the ball on a short stock theoretically means potential for infinite losses.

However, buying inverse ETFs doesn’t involve borrowing anything. Much like shorting a stock, you’re betting against the upward performance of an index to profit.

But you can hold on to your inverse ETF shares even if the index goes up. Although they aren’t built to be long-term investments, you can sell those shares if the index drops at a later date.

Disadvantages of inverse ETFs

When you invest in an inverse ETF, you’re betting that a given index or benchmark will drop, thereby netting you gains. However, the opposite happens if the index happens to go up. Your losses can be even greater if you invested in leveraged ETFs because these are designed to magnify the daily performance of a given index.

Moreover, inverse ETFs tend to have higher fees or expense ratios than traditional ETFs because they’re actively managed and rebalanced daily.

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Bottom line

Bearish ETFs can generate bullish returns when the stock market is down or when a particular sector goes down. But inverse ETF investing takes strategizing because you’re aiming to profit by betting against the rise of a particular index or benchmark. So the losses can be as big as the potential return.

Buy shares of inverse ETFs through most brokerage accounts. But fees and other factors can eat into your returns. So make sure you compare your investing platforms before you open an account.

Frequently asked questions

Disclaimer: This information should not be interpreted as an endorsement of futures, stocks, ETFs, CFDs, options or any specific provider, service or offering. It should not be relied upon as investment advice or construed as providing recommendations of any kind. Futures, stocks, ETFs and options trading involves substantial risk of loss and therefore are not appropriate for all investors. Trading CFDs and forex on leverage comes with a higher risk of losing money rapidly. Past performance is not an indication of future results. Consider your own circumstances, and obtain your own advice, before making any trades.

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