Inverse exchange-traded funds (ETFs) and inverse exchange-traded notes (ETNs) are marketed to investors looking to profit from—or protect against—declining markets. More specifically, they are used to create so-called "short" positions (which bet on a down market) in a large number of securities, commodities, or currencies. An investor buys a single product that's easily traded on an exchange and sells it within the same day.
You can use inverse ETFs and inverse ETNs—which are both categorized as exchange-traded products (ETPs)—to inversely track an underlying index or group of investments you believe will drop in value. Or, you can use it to hedge against downside risk in similar investments you own (in a long position).
- Inverse exchange-traded funds are funds whose underlying assets perform opposite of the stock index the fund tracks.
- Inverse exchange-traded notes is a note similar to a bond that performs opposite that of the security it tracks.
- Both inverse ETFs and ETN are not designed for long-term strategies but are best used during short-term market swings.
According to brokers and regulators, these products are generally only for very short-term investments and may present significant risks to less sophisticated investors. In January 2019, the Vanguard Group—the second-largest provider of ETFs in the world—said it would no longer accept new investments in leveraged or inverse ETFs and ETNs. E-Trade's website warns investors that the longer you hold a leveraged or inverse ETF, the greater your potential loss.
The U.S. Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) issued an alert during the 2009 financial crisis warning prospective inverse exchange-traded product investors not to assume any stated performance objectives apply beyond one day.
Short-Term Investments With Higher Expenses
The values of inverse ETFs and inverse ETNs are typically recalculated every day, along with the financial instruments that make them up. The complicated rebalancing involved is one reason these inverse ETPs may not accurately reflect the intended opposite performance of their benchmark beyond that particular day.
In addition, inverse ETPs usually have higher expense ratios than those of other ETPs because of the frequent buying and selling of their underlying derivatives.
How Inverse ETFs and ETNs Work
Inverse ETFs use derivatives—financial instruments that derive their value from another instrument or instruments—to mimic the opposite performance of their underlying benchmark. These derivatives typically include various types of futures contracts, which are agreements to buy or sell a particular asset at a set price on an agreed-upon date. As a result, ETF share prices generally correlate to the net asset value of their holdings.
Inverse ETNs are unsecured debt securities similar to bonds that provide the opposite performance of an underlying index of securities, commodities, or currencies. At maturity, they will pay the opposite of the return of the benchmark they track. You can also make money from them—and inverse ETFs—by selling them for more than your purchase price. Inverse ETN market prices are determined in part by the performance of the underlying index and are also affected by the perceived creditworthiness of their issuer.
How Leveraged Inverse ETFs and ETNs Work
Inverse ETFs and inverse ETNs may also be leveraged. If they are, they aim to offer a return two to three times the inverse return of their underlying benchmark before fees. Leveraged ETPs offer multiples of the returns or the reverse of the returns of their benchmark. They also may produce losses that are two to three times that of a non-leveraged ETP. With that in mind, you can see how it's possible to quickly lose the entire value of your investment.
Inverse ETFs and ETNs aren't for investors who don't intend to actively monitor and manage their portfolios. You should conduct thorough research before committing money to any inverse exchange-traded products.
There are many inverse ETFs to consider. Here are several that you can add to your portfolio if you feel they're right for your investment strategy:
- DDG: ProShares Short Oil & Gas ETF
- DOG: ProShares Short Dow30 ETF
- EFZ: ProShares Short MSCI EAFE ETF
- EUM: ProShares Short MSCI Emerging Markets ETF
- MYY: ProShares Short MidCap400 ETF
- PSQ: ProShares Short QQQ ETF
- REK: ProShares Short Real Estate ETF
- RWM: ProShares Short Russell2000 ETF
- SBB: ProShares Short SmallCap600 ETF
- SBM: ProShares Short Basic Materials ETF
- SEF: ProShares Short Financials ETF
- SH: ProShares Short S&P500 ETF
- SJB: ProShares Short High Yield ETF
- TBF: ProShares Short 20+ Year Treasury ETF
- TBX: ProShares Short 7-10 Year Treasury ETF
- TYBS: Direxion Daily 20+ Year Treasury Bear 1X Shares ETF
- UDN: Invesco DB US Dollar Index Bearish Fund ETF
- YXI: ProShares Short FTSE China 50 ETF
Leveraged Inverse ETFs
Here are several -2x and -3x leveraged inverse ETFs. These products come with lots of risk and may not be right for every investor:
- BIS: ProShares UltraShort Nasdaq Biotechnology ETF (-2x)
- CROC: ProShares UltraShort Australian Dollar ETF (-2x)
- DRIP: Direxion Daily S&P Oil & Gas Exploration & Prod. Bull and Bear 2X Shares ETF (-2x)
- DUG: ProShares UltraShort Oil & Gas ETF (-2x)
- DUST: Direxion Daily Gold Miners Index Bull and Bear 2X Shares ETF (-2x)
- DXD: ProShares UltraShort Dow30 ETF (-2x)
- EDZ: Direxion Daily MSCI Emerging Markets Bull and Bear 3X Shares (-3x)
- EEV: ProShares UltraShort MSCI Emerging Markets ETF (-2x)
- EFU: ProShares UltraShort MSCI EAFE ETF (-2x)
- ERY: Direxion Daily Energy Bull and Bear 2X Shares ETF (-2x)
- EUO: ProShares UltraShort Euro ETF (-2x)
- EWV: ProShares UltraShort MSCI Japan TEF (-2x)
- FAZ: Direxion Daily Financial Bull and Bear 3X Shares ETF (-3x)
- FXP: ProShares UltraShort FTSE China 50 ETF (-2x)
- GLL: ProShares UltraShort Gold ETF (-2x)
- KOLD: ProShares UltraShort Bloomberg Natural Gas ETF (-2x)
- LABD: Direxion Daily S&P Biotech Bull and Bear 3X Shares ETF (-3x)
- MZZ: ProShares UltraShort MidCap400 ETF (-2x)
- PST: ProShares UltraShort 7-10 Year Treasury ETF (-2x)
- QID: ProShares UltraShort QQQ ETF (-2x)
- REW: ProShares UltraShort Technology ETF (-2x)
- RXD: ProShares UltraShort Health Care ETF (-2x)
- SCC: ProShares UltraShort Consumer Services ETF (-2x)
- SCO: ProShares UltraShort Bloomberg Crude Oil ETF (-2x)
- SDD: ProShares UltraShort SmallCap600 ETF (-2x)
- SDOW: ProShares UltraPro Short Dow30 ETF (-3x)
- SDP: ProShares UltraShort Utilities ETF (-2x)
- SDS: ProShares UltraShort S&P500 ETF (-2x)
- SIJ: ProShares UltraShort Industrials ETF (-2x)
- SZK: ProShares UltraShort Consumer Goods ETF (-2x)
- SRS: ProShares UltraShort Real Estate ETF (-2x)
- SRTY: ProShares UltraPro Short Russell2000 ETF (-3x)
- SSG: ProShares UltraShort Semiconductors ETF (-2x)
- SMDD: ProShares UltraPro Short MidCap400 ETF (-3x)
- SMN: ProShares UltraShort Basic Materials ETF (-2x)
- SOXS: Direxion Daily Semiconductor Bull and Bear 3X Shares ETF (-3x)
- SPXS: Direxion Daily S&P 500 Bull and Bear 3X Shares ETF (-3x)
- SPXU: ProShares UltraPro Short S&P500 ETF (-3x)
- SQQQ: ProShares UltraPro Short QQQ ETF (-3x)
- TBT: ProShares UltraShort 20+ Year Treasury ETF (-2x)
- TYO: Direxion Daily 7-10 Year Treasury Bull and Bear 3X Shares ETF (-3x)
- TZA: Direxion Daily Small Cap Bull and Bear 3X Shares ETF (-3x)
- TMV: Direxion Daily 20+ Year Treasury Bull and Bear 3X Shares ETF (-3x)
- TTT: ProShares UltraPro Short 20+ Year Treasury ETF (-3x)
- TWM: ProShares UltraShort Russell2000 ETF (-2x)
- YCS: ProShares UltraShort Yen ETF (-2x)
- ZSL: ProShares UltraShort Silver ETF (-2x)
Below are several inverse ETNs to consider if you feel they'd be a good addition to your portfolio:
- BTYS: iPath Series B US Treasury 10-Year Bear ETN
- DFVS: iPath US Treasury 5-Year Bear ETN
- DLBR: VelocityShares Short LIBOR ETN
- DLBS: iPath US Treasury Long Bond Bear ETN
- DTUS: iPath US Treasury 2-Year Bear ETN
- FLAT: iPath US Treasury Flattener ETN
- GNAF: MicroSectors FANG+ Index Inverse ETN
- KNAB: MicroSectors U.S. Big Banks Index Inverse ETN
- TAPR: Barclays Inverse U.S. Treasury Composite ETN
- XXVFF: iPath Inverse S&P 500 VIX Short-Term Futures ETN
- YGRN: MicroSectors U.S. Big Oil Index Inverse ETN
Leveraged Inverse ETNs
Here are several -2x, and -3x leveraged inverse ETNs. These products come with lots of risk and may not be right for every investor:
- BNKD: MicroSectors U.S. Big Banks Index -3X Inverse Leveraged ETN
- BNKZ: MicroSectors U.S. Big Banks Index -2X Inverse Leveraged ETN
- FNGD: MicroSectors FANG+ Index -3X Inverse Leveraged ETN
- FNGZ: MicroSectors FANG+ Index -2X Inverse Leveraged ETN
- NRGD: MicroSectors U.S. Big Oil Index -3X Inverse Leveraged ETN
- NRGZ: MicroSectors U.S. Big Oil Index -2X Inverse Leveraged ETN
The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.