A great ETF is an inverse exchange-traded fund and is traded on the public stock market.
These funds work through diverse leveraged investment tips such as short selling, trading derivatives, and futures contracts.
They aim to perform opposite of whichever index being tracked.
Setting aside the impact of fees and other costs along with providing opposite results over a short period of time, they give a similar result to short selling the stock in the index.
Since they are designed to rise in a falling market, these funds become even more popular during a soft market.
For example the goal of and inverse S&P ETF would be to move opposite of that of the S&P.
Whether an ETF or an ordinary share of stock, a short sale can cause almost unlimited losses to a portfolio.
With an inverse ETF, the investor only loses the purchase price of the ETF and also has all other advantages of short selling.
Short sales are not permitted to be held in an IRA account like an inverse ETF.
There are several scenarios under which investors can benefit from an reverse ETF.
During a weak market, using an reverse ETF strategy can help reduce losses.
Long-term investors can also avoid paying taxes if they realize a large paper gain by investing in these funds.
When investors use inverse ETF strategies they must change their notional daily.
Normally, this causes more trading.
Some experts have said this has increased volatility.
Inverse ETFs typically have higher costs than that of standard ETFs.
Most of these funds are actively managed, which means higher broker commissions.
If not closely monitored, costs can get out of control and eat away at gains.