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Investing in a situation when the market is about to enter either high volatility or a bear phase is challenging. But a inverse ETF index funds can help you achieve your investment objectives. These instruments are set up so that their price rises when the cost of the target asset falls. As a result, it is used by many investors to profit from the declining value of an asset, such as market indices.
Inverse ETFs are not a form of short selling. The most significant difference between investing in inverse ETFs and short selling is that you don’t have to hold a margin account for inverse ETFs. In short selling, the broker has to lend you money to execute your trades, and you have to pay a stock loan fee to the broker when you borrow the shares to short sell. Anyone with a brokerage account can easily buy inverse ETFs similar to how they do with individual stocks.
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The ProShares UltraPro Short QQQ ETF tracks the Nasdaq-100 market Index and attempts to provide three times the opposite results of the Nasdaq-100. It is moderately small in size and, as of Q1 of 2022, had assets worth $2.5 billion under its management.
As the Nasdaq-100 is heavily weighted toward technology, telecommunications, and health care stocks, the performance of this ETF improves when these sectors perform poorly. This ETF also owns a large amount of US Treasury securities using the proceeds of short positions. Through this, it has leveraged its inverse position, making it even more reliable.
Therefore, you can say that SQQQ prepares its investors for a more significant nonfinancial stock market to struggle. The fund has a high expense ratio of 0.95%. This can quickly eat into total return if held for a shorter term.
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The ProShares UltraShort Basic Materials ETF seeks to provide daily investment results that are twice the inverse of the Dow Jones US Basic Materials SM Index’s daily performance.
The mentioned investment results are derived before management fees and expenses.
The ProShares UltraShort Basic Materials fund has a non-diversified investment portfolio. Usually, it invests in financial instruments in which its financial advisors believe the combination would lead to daily returns consistent with the fund’s investment objectives.
Besides, the index is designed to measure the performance of US companies in the basic materials industry, which are more sensitive to commodity price movements. This fund can benefit a lot in the event of a market crash.
This fund also has a high expense ratio of 0.95%. So, it might be a great long-term hold as well.
The ProShares UltraPro Short S&P 500 is another highly leveraged ETF that seeks to provide three times the inverse of the average daily S&P 500 market index performance. It is best suited for investors with a bearish short-term outlook for large-cap stocks, so having it in the portfolio can be highly beneficial in the event of a market crash.
SPXU uses short sales and futures to attain its investment objectives, so SPXU is a speculative and aggressive investment with a significant amount of risk. Investors can lose some or all of their investment or principal if they are not cautious enough. Also, investors with a lower risk tolerance might not find it suitable because of this.
Moreover, the ETF’s leverage resets daily, resulting in a compounding of returns when held for multiple periods. However, the target for this index is one-day return only which means if held for longer than one day, returns may be significantly different than the targeted one.
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This ETF provided by Direxion provides inverse exposure (3x) to the US equities. It has been designed to track down the performance of the Dow Jones Internet Composite Total Return Index – USD. Generally, it invests in swap agreements, futures, short positions, or other financial instruments.
As a result, a synthetic exposure to the index is created, and anyone who owns this ETF can indirectly earn that index’s return. Besides, as the companies in this index generate at least 50% of their revenue from internet-related services, in the event of a market crash, the investors can be in an advantageous position as it is the tech and internet companies that are usually the most affected ones when such an event occurs.
This ETF by Direxion offers 3x daily short leverage based on the broad-based MSCI Emerging Markets Index, so it is appropriate for investors with a bearish short-term outlook on emerging markets. Similar to WEBS, this one too invests in swap agreements, futures, short positions, or other financial instruments, providing an inverse exposure to the index. Moreover, as the said index is designed to represent the performance of large- and mid-cap securities across 24 emerging market countries when a global market crash occurs, EDZ investors will be able to secure their portfolio primarily.
Inverse ETFs are undoubtedly a great source of investment ahead of a market crash. However, they require a lot of understanding if someone intends to hedge their portfolios using them. The inverse ETFs mentioned above have been relatively great performers and can also perform well in situations when the market goes downhill. So, investors can go for any of them after doing their research.
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