Inverse ETF

Posted by ETF Guy in List of ETFs

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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 [...]

Inverse ETF

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9 Responses to “Inverse ETF”

Joan:

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.

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Crashnburn:

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.

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John Aitek:

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.

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charles:

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.

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Pradipto:

Inverse ETFs are very useful tools for finance professionals, particularly on the buy side firms, who have severe restrictions on their personal trading imposed by their firms. Most commonly they could include (like in my case) (a) a minimum holding period of 90 days (b) NO short-selling.

Now suppose for example, you happen to invest in an index ETF and 10 days later you realized that the top has happened. You can't get out due to personal trading restrictions. What could you do ? You need to hold that ETF for another 90-10=80 days and you can't take a fresh short position either.

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Dude101:

While it's true that simply negating another investment is counter-productive, this is not the role of shorting.

Often, portfolios are almost fully invested and deciding to pull the plug and sell may trigger large capital gains.

A short in a specific sector may take the edge off the risk of a larger composite index.

For example, The Canadian index (S&P/TSX) contains large portions of energy and mining stocks as well as financials. If an investor decides that the energy portion of the index is getting to risky he can short an energy position to offset some of that risk, while keeping the overall composite index.

Thus, if the index had been held for a few years, holding on to it does not trigger a massive taxable capital gain.

Any shortfall attributable to the energy sector would be somewhat offset by the rise of the energy shorts. As a bonus, should the investor be long term bullish on energy, the extra earnings on the shorts could be reinvested at a lower buying price.

So, short ETFs are decent tools to offset sectors that appear to be weakening, without having to resort to a wholesale cashing out of a portfolio. It thus gives some extra breathing room in cash and time to decide one's long term asset allocation, especially when the direction of the markets seem uncertain.

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