With thousands of exchange-traded funds, or ETFs, out there, it’s easy for investors to pick a specific strategy and buy into it with just a single holding.
Want to invest in tech stocks? There are dozens of ETFs for that. Want to invest in China? There are dozens more. There are even funds like the $6 billion KraneShares CSI China Internet ETF (ticker: KWEB) that offer exposure to tech stocks in China.
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With variety like this, it should not be surprising that there are also exchange-traded products that allow investors to profit on the downside of specific markets instead of simply capturing the upside.
These so-called inverse ETFs could boost your portfolio even when the broader stock market drops. They could also leave you deep in the red. Here’s a look at how inverse ETFs work, along with some popular examples:
— What are the risks of inverse ETFs?
— Inverse Cramer ETF: A case study.
— The most popular inverse ETFs.
What Are the Risks of Inverse ETFs?
On the surface, inverse ETFs are much like the other funds out there, as they hold a group of investments that you can easily buy using a standard brokerage account, such as Robinhood, Charles Schwab or TD Ameritrade.
That makes it easy to buy an inverse ETF. But before you run out and do so, here are a few important warnings about these risky instruments:
Buy-and-hold is not ideal for inverse ETFs. First, while there are undoubtedly rough spots now and then — such as in 2022 with the S&P 500 index losing roughly 20% on the year — history shows that Wall Street always trends higher in the long run. The market recovered from the Great Recession, the 1987 crash, the Great Depression and from every other downturn in between. It’s fine to look for a little insurance or a short-term opportunity now and then, but holding inverse ETFs for extended periods can be a costly mistake.
Underperformance is a risk. History also shows that active management of a portfolio tends to result in underperformance. Consider that in 2022, more than half of large-capitalization stock fund managers underperformed the S&P 500 to mark the 13th consecutive year that most investors would have been better off buying and holding index funds. If active funds with experienced managers cannot navigate market downturns better than a passive index, it may be naive to think you can time trades better.
Inverse ETFs are pricey. Inverse ETFs are complicated instruments with above-average expenses. That means you will not get a 1-to-1 return in the opposite direction of the asset you’re targeting because the fees and the structure will provide variance, particularly in the long term. Furthermore, many inverse ETFs aren’t even designed to be 1-to-1, but instead offer “leveraged” inverse exposure intended to deliver two or three times the movement of certain assets.
All this is to say: Make certain you understand exactly what you’re buying and what your goals are before you shop for an inverse ETF.
[READ: Should You Consider Short Selling? 5 Pros, 5 Cons]
Inverse Cramer ETF: A Case Study
Consider the Inverse Cramer Tracker ETF (SJIM) and the Long Cramer Tracker ETF (LJIM) as examples of how exchange-traded products can take nearly opposite approaches.
As many investors know, CNBC personality and TheStreet.com founder Jim Cramer is one of the most closely followed analysts on Wall Street. Many individuals will buy or sell stocks based on his recommendations.
If you believe in Jim Cramer’s picks, you can simply buy the Long Cramer ETF and let this portfolio do the work for you. The top-two holdings as of March 14 were Facebook parent company Meta Platforms Inc. (META) and chipmaker Advanced Micro Devices Inc. (AMD).
Of course, not everyone is eager to follow Jim Cramer’s advice. That’s where the Inverse Cramer ETF comes into play. Keep in mind that it isn’t the exact opposite of LJIM because it doesn’t bet against the same stocks in equal measure. Instead, it either holds short positions in his picks or buys equities he recommends against. The top positions in this fund are financial services firm Block Inc. (SQ) and consumer electronics company Vizio Holding Corp. (VZIO).
This is not to say that the funds aren’t related, but variance exists even though the two funds try to play opposite sides of the same strategy.
As a disclaimer, this info is for illustrative purposes only. The LJIM and SJIM funds only launched in early March, so they don’t have significant track records. They also only have less than $7 million in total assets combined and trade a small number of shares daily, so they can be illiquid. Generally, if you’re looking for an inverse fund, you should consider more established products.
The Most Popular Inverse ETFs
With that in mind, here’s a brief rundown of some of the most popular inverse ETFs on Wall Street right now. Each offers something slightly different, but all are well established.
ProShares UltraPro Short QQQ (SQQQ). This roughly $5 billion fund seeks daily performance that is three times the inverse of the Nasdaq-100 Index. The Nasdaq-100 is a tech-heavy index that holds some of the largest tech-sector companies, such as Microsoft Corp. (MSFT) and Apple Inc. (AAPL), so this is a supercharged way to take the opposite side of the trade on Big Tech.
ProShares Short S&P500 (SH). Another ProShares fund, this is not a leveraged product and instead returns roughly the inverse of the S&P 500. That means if you want a short-term bet against U.S. large caps or even if you simply want a little insurance against declines, the nearly $3 billion SH is worth a look.
ProShares Short QQQ (PSQ). Hearkening back to our first fund, this smaller ProShares option only has $1.6 billion in assets and lacks the leverage on its tie to the Nasdaq-100. It’s essentially the same fund as SQQQ, but it isn’t leveraged if you don’t want as risky of a bet.
Direxion Daily Semiconductor Bear 3x Shares (SOXS). Next in line is this $1.4 billion Direxion inverse fund that is designed to deliver three times the opposite movement of the ICE Semiconductor Index. That makes this fund laser-focused on betting against companies such as Broadcom Inc. (AVG), Texas Instruments Inc. (TXN) and Nvidia Corp. (NVDA).
ProShares UltraPro Short S&P500 (SPXU). This inverse S&P 500 fund is tied to the flagship benchmark of U.S. stocks, but instead of just being a direct inverse, it seeks three times the inverse performance. If you really are bearish on Wall Street, this $1.4 billion inverse fund is an option — if you’re OK with the risks, of course.
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Inverse ETFs: What They Are and How to Invest in Them originally appeared on usnews.com
Update 03/15/23: This story was previously published at an earlier date and has been updated with new information.
