Inverse ETFs
What It Is
Inverse ETFs aim to deliver the opposite of the daily performance of an underlying index, allowing traders to profit from market declines.
Why It Matters
They provide a way to hedge or speculate on downturns without short selling.
How It Works
- Use derivatives to achieve inverse exposure
- Reset daily, similar to leveraged ETFs
- Performance diverges over longer periods due to compounding
- Often used for short‑term tactical trades
Key Components
- Inverse exposure
- Daily reset
- Derivative contracts
- Volatility impact
Example
A –1× inverse ETF rises 1% when the underlying index falls 1% in a single day.
Key Takeaways
- Inverse ETFs are short‑term hedging tools.
- Long‑term holding can produce unexpected results.
- They carry significant risk during volatile markets.