Shorting the Market with Inverse ETFs
Obviously, from recent activity, stock indices doesn’t keep going up forever. For awhile, technical indicators (and market commentators) had been showing some warning signs that markets were overbought and that a correction was on the way.
Finally, it became evident that our friend, the trend, was losing steam.
So, I thought I would look into what it means to take a position on an inverse ETFs. Is this a good idea if you can’t identify any long positions to take?
The answer it seems is, yes, but with the caveat that they generally only work out well in short-term trades or for major long-term corrections. In a volatile market, it’s best to avoid them.
The reason: Over time and more trading periods, the volatility compounds returns and losses on an increasing or decreasing ETF price, such that over the longer-term you can expect a disconnect between gains/losses on a regular ETF and those on the corresponding inverse ETF.
The bottom line is, inverse ETFs are designed as a short-term hedging instrument and are not suitable for long-term investments as inverse results don’t replicate over extended time periods. They only replicate on a day-to-day basis.
Here is an Inverse Equity ETF List and the following are some examples:
ProShares Short S&P 500 ETF (SH) – Inverse (-1x) of the daily performance of the S&P 500.
ProShares Short Dow30 ETF (DOG) – Inverse (-1x) of the daily performance of the Dow Jones Industrial
ProShares Short Dow30 ETF (DXD) – Two times the inverse (-2x) of the daily return of the Dow Jones Industrial Average.
Direxion Daily Small Cap Bear 3x Shares (TZA) – Three times the inverse of the Russell 2000 Index.
Direxion Daily Financial Bear 3x Shares (FAZ) -Three times of the inverse of the Russell 1000 Financial Services Index.