Inverse ETF

Intermediate

An inverse ETF is an exchange-traded fund designed to move in the opposite direction to an index on a daily basis, so that it rises when the index falls, using derivatives such as futures and swaps.

Inverse ETFs allow investors to profit from, or hedge against, a fall in an index without short selling or using derivatives directly. A standard inverse ETF aims to deliver minus one times the index’s daily return; leveraged inverse ETFs aim for minus two or minus three times.

For example, if an index falls 2% in a day, a minus 1x inverse ETF should rise about 2%. If the index rises 2%, the ETF should fall about 2%.

Like leveraged ETFs, inverse ETFs reset daily, so their returns over longer periods can differ significantly from the inverse of the index’s return, especially in volatile markets. An investor holding an inverse ETF for several months may lose money even if the index ends lower.

Inverse ETFs are designed mainly for short-term trading or hedging. They are complex products, and regulators have warned retail investors about holding them for long periods. Investors can lose a large share of their money if markets rise steadily.

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