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.
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The value of inverse ETFs is that you can make money while the market is going down. We did see it do that in 2008! You can even use them in IRAs where you cannot use options.
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.
woody's comments are accurate. take a look at FAS and FAZ in the US NYSE and you'll see what can be done for trade balancing. these are true inverse/mirror ETF's.
if you have the nerve for it, you can swing -trade them all day long - never a bad day in the market !!