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What an Inverse ETF is and How to Invest in One

By Edited Jun 11, 2016 0 0

The most common thing I hear from people who will not invest during tough economic times is that reason - they think the market is doing bad so they should not invest in it. They also may think that the market will go lower from here and are afraid of losing their money. Unfortunately these people fail to realize that you can make money IN ANY MARKET! Besides buying a stock you can SHORT a Stock. But shorting stocks is not exactly easy and you have to know what you are doing. However, buying an Inverse ETF fund is the next best thing.

The Definition of An Inverse ETF

"An exchange-traded fund (ETF) that is constructed by using various derivatives for the purpose of profiting from a decline in the value of an underlying benchmark. Investing in these ETFs is similar to holding various short positions, or using a combination of advanced investment strategies to profit from falling prices," according to Investopedia.

These ETF are designed SPECIFICALLY to go up when the market goes down. This is great for investors who obviously are bearish on the market and think it will go down. It makes their lives a whole lot easier. You can also use inverse ETFs as a HEDGE against your stock portfolio for these reasons.
One BIG advantage of these inverse ETFs is that they can be held in your IRA or 401K account - you cannot short stocks in those accounts.
So, you think we're in for a bear market? Well then I think you should at least take a look at an inverse ETF. There are a bunch of Inverse ETFs out there on the market, but I've listed here below some of the most popular and a few of my personal favorites:
  • Short QQQ (Quote: PSQ) - This is short the Nasdaq 100 index. 
  • Short Dow 30 (DOG) - Short the Dow. 
  • Short Russell 2000 (RMW) - Short the Russell 2000 index. 
  • Ultra Short Mid Cap 400 (MZZ) - Short S&P Mid Cap Index
  • Proshares Short Financials (SEF) - Short the Dow Jones U.S. FinancialsSM Index.

My advice is, if you are a believer that the market is in for a downturn (Like I am) then buying a position in an inverse ETF could be for you

The Chart for SEF - Ultra Short Financials

Inverse ETF's Could Take Off
. However, I would recommend having an exit strategy for your position. I don't expect the market downturn to last forever - just into mid 2012 ish - so my plan is to sell sometime then (I believe this for a couple of reasons, but mainly I think that QE3 of some form is coming). THIS IS A TRADE - not a long-term investment. Also keep in mind that ETFs have expense ratios.

I hope that you learned what exactly an inverse ETF is and how you can potentially profit from one in a market downturn. This was merely for informational purposes and not an investing recommendation. Please do your own due dilligence when investing.

Full Disclosure: I am long SEF.

Inverse ETF Chart

Inverse ETF's Could Take Off
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