Definition
Inverse ETFs use derivatives to provide -1x the daily return of an index—they rise when the index falls. Like leveraged ETFs, daily compounding means long-term returns diverge from the expected inverse. Inverse ETFs are used for short-term hedging or bearish bets without the complexities and margin requirements of short selling.
lightbulb Example
The S&P 500 drops 2% today. An inverse S&P 500 ETF rises approximately 2%. But over a month of mixed returns, the inverse ETF's cumulative return won't exactly equal the negative of the index's return due to daily rebalancing effects.
verified_user Key Points
- Delivers -1x DAILY return of the underlying
- Subject to same compounding decay as leveraged ETFs
- Used for short-term hedging or bearish bets
- Avoids complexities of short selling