What Are Inverse ETFs?
Are Inverse ETFs Preferred?Inverse ETFs became a preference for traders who were initially shorting stocks in order to seek bearish positions. They preferred this since shorting individual stocks posed various risks on many levels. It also proved costly at times to short stocks as a trader would inevitably have to borrow on margin or end up paying high fees for the borrowed money. Another reason why inverse ETFs have become a preference to many traders especially those who do put options is because initially, they had to trade the options in a limited time frame. They were under so much pressure to beat the expiry time. However, with Exchange Traded Funds, there is no such pressure. A trader can actually hold the inverse ETF for an extended time period hence posing as a better option than put options. Most investors who go the inverse ETF route do not have a long-term horizon with regard to the investments. Even so, these ETFs make use of daily futures contracts in order to have great returns.
Advantages of Inverse ETFsETFs do not require investors to hold margin accounts. This provides a great convenience especially for investors who want to enter short positions. Investors can choose those ETFs that profit from the declines in the broad market indexes. An example of such a broad market index is the NASDAQ 100 and the Russell 2000. Another advantage that inverse ETFs have is the fact that some focus on a specific sector. Hence, as an investor, you can choose a specific sector of choice out of the following:
- Consumer products
- Energy sector
- Financial sector
- Agricultural sector
The Downsides of Inverse ETFsThe first downside can be derived from the high expense ratios. This is due to the fact that Inverse ETFs are actively managed funds. But, if you hold inverse ETFs for a short while, you are better off. Secondly, inverse ETFs are likely to underperform in the long run. You are better off shorting stocks or index funds.
Is It Advisable To Use Index Funds?If you’re seeking a short-term market timing or hedging, then it’s advisable to use inverse ETFs. However, due to their daily re-balancing needs, they are best handled by professionals and investors who have the requisite experience. If you’re thinking of going the inverse ETF way, then you can tap on to the Proshares Short S&P500. It’s currently the largest inverse ETF in the market. In conclusion, inverse ETFs are the best picks for risk-tolerant traders owing to the advantage it brings in establishing short positions.
This article is available only to alvexo plus members, register now, and get 7 days of free membership.
You are a Member!
Your Alvexo plus membership is free only for one week, to extend the membership you need to deposit funds into your account and trade with alvexo
You're Membership is expired!
Your Alvexo plus membership is expired, to extend the membership and your financial knowledge you need to deposit funds into your account and trade with alvexo