When you invest in the stock market, you can bet on both sides of the market using an online broker account. Inverse ETFs (exchange-traded funds) are an easy way to place bearish bets without physically shorting shares of stock.
Bottom line, the following ETFs go up in value as the underlying benchmark index they track goes down. See also: List of Long ETFs (Bullish ETFs).
To compare online brokers for trading ETFs, read our online broker guide and use our comparison tool. I recommend Fidelity which has the best ETF research tools (ETF screeners, charting, third-party reports, etc) and overall experience for ETFs.
» Want to know more? Read our quick takes on ETFs and mutual funds.
One of the Fast Money guys mentioned the UltraShort Oil & Gas ProShares ETF (DUG) on a recent showNew Delhi Investment. He questioned how that ETF, which is the double inverse of oil & gas could be up for the day while oil was also up. A quick look at what DUG actually is gives the answer:
That “daily” part adds one complication to the pictureAgra Investment. From the article “Understanding ProShares’ Long-Term Performance” on ProShares’ site:
The article goes on to explain how & why this happens. But the question about how DUG could be up while the price of oil was also up is answered by looking at what comprises DUG — the Dow Jones U.S. Oil & Gas Index. That index “measures the performance of the energy sector of the U.SAgra Stock. equity market. Component companies include oil drilling equipment and services, coal, oil companies-major, oil companies-secondary, pipelines, liquid, solid or gaseous fossil fuel producers and service companies.”
Note that the actual price of oil is not mentioned. When you look at how that index is constructed you’ll see that ExxonMobil Corp. (XOM) makes up 28%, Chevron Corp. is 11% and ConocoPhillips is 7%. So at least 46% of the index is big oil companies (major integrated oil & gas). Then the question is how does the price of oil relate to movements in those oil companies? Or more broadly, how do ETFs compare against the underlying over longer periods of time?
Below we’ve plotted oil ($WTIC) vs. the ETF tracking oil (USO) over 2008 – 2018.
This shows that the price of oil has seriously outperformed the ETF, USO. Bottom line, be careful with which ETFs you are holding long. For more on this topic, ETFDB has a good post, 7 Risks of Trading Leveraged ETFs and How to Avoid Them.
An inverse exchange-traded fund, or inverse ETF, moves in the opposite direction of a specified investment or index. Investors who cannot short securities because of account restrictions, liquidity, or inability to find stock to short can still take a bearish position by buying an inverse ETF.
Inverse ETFs are managed to generate the exact opposite return of a specific investment or index for a specified period, typically a day. For example, the expected one-day return of a portfolio invested 50% into an S&P 500 index fund and 50% into an inverse S&P 500 index fund should be zero.
ProShares offers three ETFs that are managed to provide returns that perform in the opposite direction of the Dow Jones Industrial Average. The ProShares Short Dow 30 (DOG) targets unlevered inverse daily returns, while the ProShares UltraShort Dow 30 (DXD) is managed to generate two times the inverse daily returns, and the ProShares UltraPro Short (SDOW) seeks to return three times the inverse daily returns of the Dow Jones Index.
Short ETFs, otherwise known as inverse ETFs, use complicated financial derivatives to achieve their investment objectives. They are best suited for sophisticated traders or long-term investors seeking to temporarily hedge long-term positions. Derivative users (both managers and investors) have occasionally made errors that led to catastrophic losses.
Bangalore Wealth Management