Inverse ETFs

Inverse exchange-traded funds (ETFs) are a type of security made up of derivatives (like futures and options) and debt. They are designed to profit from a decline in the value of an underlying index, asset class or other benchmark.

Inverse ETFs seek opposite returns of their traditional counterparts. These inverse ETFs are sometimes called “Bear” or “Short” ETFs.

For example:

Inverse ETFs are also sometimes leveraged, which means that their performance targets a 2:1 (double) or even 3:1 (triple) ratio for their daily return on equity. Inverse leveraged ETFs work similarly to their non-inverse leveraged counterparts, they just provide opposite returns, these leveraged ETFs are explained in more detail in the article above.

For example: If a traditional Nasdaq-100 ETF declines by 2% in a day, the 3x leveraged inverse ETF tracking the same Nasdaq-100 index will gain 6%.

Fund managers of inverse ETFs attempt to achieve an inverse (opposite) return on equity of the underlying index/asset class using a combination of debt, derivatives, and sometimes equity.

These funds usually target daily performance, and after fees and transaction costs for the fund managers, these funds may potentially underperform if held for a longer period of time.

Inverse ETFs are generally used as short-term investments by most traders due to these factors.

You can always look up an ETF’s Fund Fact Sheet ahead of time on the issuer’s website for more information about a specific ETF you’re interested in.

One of the main advantages of inverse ETFs is the ability to trade these in registered accounts (like a TFSA or RRSP). Normally, in a registered account, you cannot short sell a security to profit from a decline in share price (due to CRA rules).

Inverse ETFs however can be bought and sold in all accounts, thus giving you negative exposure to common asset classes, indices, or other benchmarks in an alternative way.

Check out some of the other common benefits and drawbacks of inverse ETFs below:

Note: The information in this blog is for educational purposes only and should not be used or construed as financial or investment advice by any individual. Information obtained from third parties is believed to be reliable, but no representations or warranty, expressed or implied, is made by Questrade, Inc., its affiliates or any other person to its accuracy.