Inverse ETFs let investors profit when markets fall or hedge against losses. Unlike regular ETFs, they move opposite to a specific index or asset. While they offer short-term opportunities, they\u2019re complex and carry risks. This guide explains how inverse ETGs work in Canada, regulatory considerations and tips for choosing the right fund.<\/p>
An inverse ETF, also known as a short ETF or bear ETF, is a type of exchange-traded fund (ETF)<\/a> designed to increase in value when the index or benchmark it tracks goes down. These funds use derivatives like swaps or futures to generate daily returns that move opposite to the performance of a specific index, such as the S&P 500.<\/p> There are two main types of inverse ETFs available in Canada:<\/p> Inverse ETFs have several unique features that set them apart from traditional ETFs.<\/p> Inverse ETFs are designed to move in the opposite direction of a specific index or asset. If the underlying index declines, the inverse ETF rises, and vice versa. This allows investors to gain from market declines without shorting individual stocks.<\/p> Inverse ETFs reset their performance targets and adjust their holdings daily to maintain the desired inverse exposure. This keeps the ETF aligned with its daily objective, but holding it for multiple days can lead to compounding effects that may reduce returns compared with the expected inverse performance over longer periods.<\/p> Inverse ETFs can be bought and sold through most brokerage accounts, just like traditional ETFs. They\u2019re traded on public exchanges, making them easy to access for both beginner and experienced investors.<\/p> Inverse ETFs are actively managed and rebalanced daily to meet their target returns. Fund managers adjust derivative positions to maintain inverse exposure, which requires ongoing monitoring and makes them more hands-on than passive ETFs.<\/p> Inverse ETFs rely on financial derivatives such as futures, swaps and options to produce inverse performance relative to a benchmark index. These instruments allow the fund to achieve the opposite market movement efficiently, but they also introduce additional risks, including counterparty and liquidity risk.<\/p> There are several reasons why you should consider investing in inverse ETFs, including:<\/p> While they have their advantages, there are also several risks you should consider before investing in inverse ETFs, such as:<\/p> To invest using inverse ETFs, you must first have a discount brokerage account. Then, it\u2019s time to consider the options. To get started, here are 10 of the best-known inverse ETFs in Canada.<\/p> 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\u2019t looking to hold onto stocks for the long run.<\/p> Buy on Questrade<\/a><\/p> Designed to perform in the opposite direction of the S&P 500<\/a>, this ETF can be useful during bear markets. Results are delivered over a single trading session, with exposure resetting daily. The ProShares Short S&P 500 might be suitable for investors who want to bet against large-cap US equities and who don\u2019t plan to hold their stocks in the long run.<\/p> Buy on Questrade<\/a><\/p> This ETF tracks the 100 largest nonfinancial securities on the Nasdaq<\/a>. Results are delivered over a single trading session, with exposure resetting daily. The PSQ may be suitable for short-term investors who want to hedge against their Nasdaq investments or bet against top Nasdaq nonfinancial stocks.<\/p> Buy on Questrade<\/a><\/p> 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. This ETF is best for investors with a high risk tolerance who aren\u2019t looking to hold onto stocks for the long run.<\/p> Buy on Questrade<\/a><\/p> 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. This ETF is best for investors with a high risk tolerance who aren\u2019t looking to hold onto stocks for the long run.<\/p> Buy on Questrade<\/a><\/p> This ETF is designed to deliver -3x the daily performance of the S&P 500, which contains some of the biggest blue-chip companies in America. Investors could use this ETF to hedge against existing S&P 500 investments or bet against large-cap, blue-chip companies in the US.<\/p> Buy on Questrade<\/a><\/p> 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. This ETF is best for investors with a high risk tolerance who aren\u2019t looking to hold onto stocks for the long run.<\/p> Buy on Questrade<\/a><\/p> 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. This ETF is best for investors with a high risk tolerance who aren\u2019t looking to hold onto stocks for the long run.<\/p> Buy on Questrade<\/a><\/p> This ETF is designed to deliver -1x the daily performance of the Russell 2000 Index, which tracks US small-cap stocks. The RWM may be suitable for short-term investors who want to hedge against existing investments or bet against small-cap US stocks.<\/p>Key features of inverse ETFs<\/h3>
Opposite market movement<\/strong><\/h4>
Daily resetting and rebalancing<\/strong><\/h4>
Accessible<\/strong><\/h4>
Active management<\/strong><\/h4>
Use of derivatives<\/strong><\/h4>
Benefits of investing in inverse ETFs?<\/h3>
Risks of investing in inverse ETFs<\/h3>
10 inverse ETFs in Canada investors should consider<\/h3>
ProShares UltraPro Short QQQ<\/h4>
ProShares Short S&P 500<\/h4>
ProShares Short QQQ<\/h4>
ProShares UltraShort S&P 500<\/h4>
ProShares UltraPro Short S&P 500<\/h4>
Direxion Daily S&P 500 Bear 3X Shares<\/h4>
ProShares UltraPro Short Dow 30<\/h4>
Direxion Daily Small Cap Bear 3X Shares<\/h4>
ProShares Short Russell 2000<\/h4>