Contributor, Benzinga
June 21, 2023

Invest in the best inverse ETFs with Interactive Brokers as your online brokerage.

Exchange-traded funds (ETFs) that generate inverse returns of their underlying indices are known as inverse ETFs. To achieve this, inverse ETFs use derivative securities, such as swap agreements, futures contracts or options. Inverse ETFs are considered useful investment vehicles by speculative traders and investors seeking day trades against any underlying benchmark index. For example, an inverse ETF that tracks the S&P 500 will decrease by 1% when the S&P gains by 1%. Here is Benzinga's list of the best inverse ETFs.

5 Best Inverse ETFs

Inverse ETF investing may be advantageous. However, all investments have advantages and disadvantages. To get the maximum exposure in this market, picking the correct inverse ETF is crucial. As a result, a list of some of the top inverse ETFs can be found below.

1. ProShares UltraShort Basic Materials (NYSEARCA: SMN)

This ETF corresponds to two times the inverse daily performance of the Dow Jones U.S. Basic Materials Index. The fund makes investments in financial instruments that ProShare aims to design to generate daily returns that are compatible with the goals of the investment strategy.

The ETF's current net expense ratio is 0.95%, and Michael Neches manages the fund. It has net assets worth $2.47 million in total.

2. Direxion Daily S&P 500 Bear 1X Shares (NYSEARCA: SPDN)

The SPDN ETF aims for daily investment results, before fees and expenses, of 100% of the inverse performance of the S&P 500 Index.

The fund invests in futures contracts, swap agreements, short positions and other financial instruments that offer short exposure to the index equivalent to at least 80% of the fund's net assets.

The fund's net expense ratio for investors is 0.49%. It has a market capitalization of over $475 million. Paul Brigandi manages the fund.

3. ProShares Ultrashort Semiconductors (NYSEARCA: SSG)

If you want to bet against the semiconductor industry, this may be the fund for you. With total assets worth $15.4 million, this investment corresponds to two times the inverse of the daily performance of the Dow Jones U.S. Semiconductors Index.

The index measures the stock performance of U.S. companies in the semiconductor sector, an industry essential to components of electronic devices.

This year the fund has produced a significant return but comes with an expense ratio of 0.95%. A few of its top holdings include the Dj U.S. Semiconductors Index Swap Morgan Stanley & Co. International Plc and the Dj U.S. Semiconductors Index Swap Societe Generale.

4. AXS TSLA Bear Daily ETF (NASDAQ: TSLQ)

Tesla has produced incredible returns over recent years, but not everyone is bullish on the company. Tesla is a growth stock, and if you are skeptical about its significant run and believe the stock might experience a bear market in the near future, then the AXS TSLA Bear Daily ETF is perfect for you.

The investment fund inversely corresponds to the performance of Tesla. The fund maintains at least 80% exposure to financial instruments that provide inverse exposure to Tesla.

The fund has produced significant gains over the years but comes with a net expense ratio of 1.15% for investors. The fund is managed by Matthew Tuttle and Parker Binion.

5. Direxion Daily Financial Bear 3X Shares (NYSEARCA: FAZ)

The Direxion Daily Financial Bear 3X Shares is an investment that aims for results of 300% inverse of the Financials Select Sector Index. An investment in this fund would constitute a bear market bet against some of the biggest U.S. financial firms represented by the S&P 500.

The fund holds assets amounting to $193 million consisting of Dreyfus Government Secs Cash Mgmt Admin and Goldman Sachs FS Treasury Intms Instl, to name two.

Because of the market's exposure to a volatile macroeconomic environment, the investment has generated a positive return this year. The fund imposes a 1.01% cost ratio on investors.

What is an Inverse ETF?

An inverse ETF is a fund constructed to profit from a decline in an underlying index it tracks. Investing in inverse ETFs is comparable to opening short bets on various equities.

Inverse ETFs use derivatives such as futures contracts to make a bet on the direction of an asset's price.

Inverse ETFs are not long-term investments since the fund manager constantly buys and sells derivative contracts. Therefore, there is no assurance that the performance of the inverse ETF will be comparable to that of an index.

They need to be actively managed to buy financial instruments; the costs that come from high trading volume are distributed to investors and charged as an expense ratio.

Given that its returns are based on the daily variation in the value of an underlying index, it is best employed as a short-term investing strategy.

Advantages of Inverse ETFs

Investors can gain a variety of benefits from investing in inverse ETFs, such as an increased amount of investment or trading opportunities. Some of the advantages are provided below.

More Opportunity

Downturns in the stock market present the ability to profit, which is one of the main benefits of inverse ETFs. This feature can help protect your portfolio and cover losses in your investments. In challenging times such as this year, contrarian investors can achieve profits by betting ahead of time the market will experience a sell-off.

Reduced Risk

If you are an investor with long-term bull positions, inverse ETFs can help cover your positions. Announcements such as earnings, U.S. data or monetary policies could jeopardize your positions. These funds can reduce risk and bring you to break even.

Limits Losses

Your losses are constrained as opposed to when you short a stock or ETF. The market risk is high if you are short-selling an asset since the losses you might sustain are limitless. An inverse ETF, however, limits your losses to the amount you invested.

Cost-Effectiveness

Inverse ETFs typically have lower expense ratios compared to actively managed funds or alternative hedging strategies. These lower costs can contribute to more cost-effective portfolio management, especially for investors seeking to implement hedging or short-term trading strategies.

Considerations with Inverse ETFs

In addition to the advantages associated with inverse ETFs, it is worth exploring important considerations associated with inverse ETFs.

Derivative Risks

Inverse ETFs provide exposure through employing derivatives. However, derivative investments are considered aggressive strategies and expose traders to credit and liquidity risks.

Costs

The costs of inverse ETFs can be significantly higher than shorting a stock. The fees, transaction charges and investing strategies used by the fund account for the increased expense ratios.

Market Bias

Ultimately, the market has a long-term positive tilt. Stocks often fare better than other asset groups. As a result, placing a bet against the stock market carries a high degree of risk.

Suitability for Portfolio Diversification

Providing the opposite return of an index or benchmark can be used for portfolio diversification but is more complex and may not be suitable for all investors. 

Experienced investors with a deep understanding of the market and higher risk tolerance should consider their investment goals and time horizon before investing in inverse ETFs.

Compare ETF Brokers

The ETF market offers many investment opportunities to individuals; however, investors must be set up with a broker to take advantage of the potential profits available. Many brokers offer different asset classes to trade but finding a broker that offers inverse ETFs may be more challenging. Below is a list of potential brokers you may look to for inverse ETFs.

Build a Thesis and Trade Inverse ETFs

An inverse ETF is a trading strategy used to bet on an asset's price movement direction. It has advantages such as increased investment opportunities and reduced risk, but investors must also consider derivative risks, costs and market bias. Compare brokers to find one that offers inverse ETFs.

Frequently Asked Questions

Q

Are inverse ETFs worth it?

A

Inverse ETFs are worth it if they are used correctly. However, their construction carries unique risks that investors must be aware of before investing. Some of these risks are listed in the article.

Q

Is QQQ an inverse ETF?

A

No, QQQ is not an inverse ETF. Instead, the QQQ tracks the Nasdaq 100 index, and just like the Nasdaq 100, it is heavily weighted toward large-cap technology companies. 

Q

What are the best inverse ETFs?

A

You can find a list of the best inverse ETFs in the article above.

About Luke Jacobi

Luke Jacobi is a distinguished professional known for his role as President at Benzinga, a renowned financial media outlet. With a background in business operations and management, Luke brings valuable expertise to his position, overseeing various aspects of Benzinga’s operations. His contributions play a crucial role in the company’s success, ensuring efficiency and effectiveness across different departments. Prior to his role at Benzinga, Luke has held positions that have honed his skills in leadership and strategic decision-making. With a keen understanding of the financial industry and a commitment to driving innovation, Luke continues to make significant contributions to Benzinga’s mission of providing high-quality financial news and analysis.