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I've thought about the idea of an inverse exchange traded fund (ETF) on occasion. The idea is that this ETF would move inversely to some index so that when the ETF would go up when the index goes down.
Something about this idea bothered me, but until today I didn't know what it was. Sure an inverse ETF could probably be constructed, but what would it be good for? The idea behind a diversified portfolio is to assemble holdings that are uncorrelated, but trend upward in the long-run. The uncorrelated feature is key as it is what reduces volatility. And the long-term upward trend is also key since you want your portfolio, in its entirety, to grow over time.
An inverse ETF on the other hand would simple move in the opposite direction of an index. So if you held equal amounts of an index ETF and an inverse ETF for that index, you would presumably make no money whatsoever. Seems kind of pointless, doesn't it?
So I finally get to toss the inverse ETF idea. I'm glad I didn't find a way to waste money on such a product.
Entries (RSS)
June 11th, 2008 at 3:22 pm
The ETF guy seems to miss the point on the use of the inverse ETF. It's a form of insurance or a hedge for the occassional storms that assault ones long term portfolio. By definition, this is a short term (less than a year exercise). Most of us are long term, buy or long side investors. We buy equities or bonds for income or because we believe they will go up in value. Most of us can live with an 8 - 10% return. When things go done in value, we trim positions to wait out the storm. Since holding cash rarely makes us money, doesn't it make sense to capitalize on the down moves as well as the up ones? Year to date the S&P 500 is down some 8%. The poor fundamentals for the financial sector (20% of the market) and the impact of energy and commodity costs on profits haven't been fully reflected yet in the markets. There's still too much optimism out there. We need more fear. What an excellent time for the inverse ETF, at least to October.
February 9th, 2008 at 1:50 am
I would prefer to find non-short etfs which move in opposite directions, where I could invest in both simultaneously, and
just profit in small amounts from the difference,but I do not
know what they would be. It seems relationships are always
mutating in an economy where the currency is not stable and
the future cost of energy is anyone's guess. You do know some
things, like no one is going to be buying clothing when gas
prices move up, or restaurant eating will falter when food prices
rise, but it is hard to link etfs up which tend to move in opposite
directions to a less degree than those which just short.
January 30th, 2008 at 10:41 pm
An ETF and its Inverse are completely anti-correlated, which means as one goes up, the other goes down. If you always sell the one that is higher, and buy the one that is lower, you'll always be selling high, and buying low. That is the whole point of Modern Portfolio Theory.
So far, I haven't had the nerve to try it, though.
January 21st, 2008 at 11:07 pm
Inverve ETFs can also be good for insurance. Suppose you were graduating in a year's time and you are worried about the possibility you will enter the job market during a recession. You can hedge against that loss by buying inverse ETFs.
January 15th, 2008 at 2:39 pm
Lets assume we are entering a bear market / recession. most sectors and stocks will fall.
I like inverse ETF's … under worse case market scenario it makes sense. also you can go long an inverse fund so your not using the same margins as shorting.
good luck putting together a balanced portfolio or hedging when the whole market crashes. we are about there now.