written by reader inverse ETFs

By Anonymous Questions, November 1, 2017

Richard Band wrote: ”an inverse ETF rises when stocks go down. You can purchase this kind of protection in amounts that can hand you $3 for every $1 you want to insure.”
What is he writing about? Can you explain?
THANKS!!!

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catherine
catherine
2 years ago

I believe he’s talking about an ETF that shorts the stock market for you.

UVXY is an example of betting against the VIX by buying an inverse ETF. This one is 2 times the inverse, and sells for about $16 right now. I started looking at it mid-March when it sold for about $72, so apparently it can turn $4 or 5 dollars into $1 when volatility goes down and stays down. But it strongly suggests not holding it long term!

It’s more common to buy a regular inverse ETF. Take a look at SH, which basically is an ETF which shorts the S&P 500, and has only lost 7 or 8% in the same time frame. These are useful when you expect a lot of volatility in the market, so they’re cheap right now when the VIX is so low. Good luck in your due diligence!

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Travis Johnson, Stock Gumshoe

Good points, catherine. Yes, inverse ETFs, whether levered or not, use futures to get their inverse exposure — so they tend to do pretty well each day (if the S&P 500 goes down 1% in a day, a 2X inverse S&P 500 ETF will typically go up 2%), but they tend to get far away from the index in the long term both because the aim is to match daily performance (not long term) and because the cost of futures and options gradually eat away at the capital.

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