Inverse ETF
Candlefocus EditorInverse ETFs are actively traded instruments on the stock market, and require investors to pay fees. The inverse ETFs track the opposite movement of their underlying benchmark, meaning that when the benchmark’s price falls, the inverse ETF’s value increases. There are several types of inverse ETFs that can focus on any particular security, index, sector, or even currency. These ETFs may use various forms of derivatives to track the benchmark’s movement, providing profit to the investor when the benchmark has negative returns.
Similar to traditional ETFs, inverse ETFs also have a performance fee associated with them. Generally, the higher the risk of an inverse ETF, the more its fees may be. Because inverse ETFs generally use derivatives, they can be riskier due to the complexity of their construction combined with the relatively short transaction histories, compared to the long histories of traditional ETFs.
Inverse ETFs are often used by individuals who want to hedge their portfolios against a potential market downturn, by allowing them to easily participate in a market without having to sell anything short. Active traders may also capitalize on market inefficiencies by using inverse ETFs to speculate on potential movements, attempting to capitalize on the potential for large but short-term gains.
Due to their risk, inverse ETFs should be used with caution and understood thoroughly before using them. For those willing to take on the additional risks inherent with inverse ETFs, these funds can offer a powerful way to take advantage of the long and short positions of the market.