Inverse ETF

AAA

DEFINITION of 'Inverse ETF'

An exchange-traded fund (ETF) that is constructed by using various derivatives for the purpose of profiting from a decline in the value of an underlying benchmark. Investing in these ETFs is similar to holding various short positions, or using a combination of advanced investment strategies to profit from falling prices.

Also known as a "Short ETF," or "Bear ETF."

INVESTOPEDIA EXPLAINS 'Inverse ETF'

One advantage is that these ETFs do not require the investor to hold a margin account as would be the case for investors looking to enter into short positions.

There are several inverse ETFs that can be used to profit from declines in broad market indexes, such as the Russell 2000 or the Nasdaq 100. In addition, it is possible to buy inverse ETFs that focus on a specific sector, such as financials, energy or consumer staples. Most investors look to purchase inverse ETFs so that they can hedge their portfolios against falling prices.

VIDEO

Loading the player...
RELATED TERMS
  1. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  2. Reverse Gold ETF

    Exchange traded funds that are designed to trade in a direction ...
  3. Margin Account

    A brokerage account in which the broker lends the customer cash ...
  4. Hedge

    Making an investment to reduce the risk of adverse price movements ...
  5. Benchmark

    A standard against which the performance of a security, mutual ...
  6. Inverse Floater

    A bond or other type of debt whose coupon rate has an inverse ...
RELATED FAQS
  1. What are the most common ETFs that track the metals and mining sector?

    There are two general types of ETFs that track the metals and mining sector. There are ETFs that invest in mining companies ... Read Full Answer >>
  2. What is the automotive sector?

    In the world of finance, the automotive sector represents the financial performance and economic variables related to automobile ... Read Full Answer >>
  3. What can cause the rate of return to be negative?

    Several factors can cause an investment to have a negative rate of return. Poor performance of a company or companies, turmoil ... Read Full Answer >>
  4. What information should I focus on in my mutual fund's prospectus?

    The U.S. Securities and Exchange Commission (SEC) requires investment companies to provide potential and current investors ... Read Full Answer >>
  5. How can I get a free mutual fund prospectus?

    Mutual funds are sold via prospectus, as mandated by the Securities Act of 1933. The prospectus document outlines many features ... Read Full Answer >>
  6. What is the best way to get exposure to electric cars when investing in the automotive ...

    Investors interested in electric cars have a variety of options. Automakers such as Tesla Motors exclusively manufacture ... Read Full Answer >>
Related Articles
  1. Mutual Funds & ETFs

    An Inside Look At ETF Construction

    If you're an investor who likes to understand how and why your investment products work, this article is for you!
  2. Mutual Funds & ETFs

    4 Ways To Use ETFs In Your Portfolio

    To take full advantage of these vehicles, you need to know how they can fulfill certain strategies.
  3. Mutual Funds & ETFs

    5 Reasons Why ETFs Work For Young Investors

    ETFs contain all of the characteristics that make them the perfect investment opportunity for young investors.
  4. Options & Futures

    Inverse ETFs Can Lift A Falling Portfolio

    These funds can reduce your exposure to market risk or enhance portfolio performance.
  5. Options & Futures

    Leveraged ETFs: Are They Right For You?

    This specialty vehicle offers dramatic results, but can also magnify risk.
  6. Mutual Funds & ETFs

    Shorting ETFs: Profit Or Peril?

    Although more detail and attention may be needed, ETFs can be shorted - and at a great profit.
  7. Mutual Funds & ETFs

    Introduction To Exchange-Traded Funds

    Get into ETFs and enjoy the benefits of a mutual fund with the flexibility of a stock.
  8. Mutual Funds & ETFs

    Exchange-Traded Funds (ETFs)

    This vehicle combines the diversification of a mutual fund with the flexibility of a stock. Learn more about them here.
  9. Mutual Funds & ETFs

    U.S. Investors Are Seeking Opportunities Overseas

    A latest analysis leads to believe that many investors are applying a spring cleaning approach to their portfolios, rebalancing as the 1st quarter ended.
  10. Options & Futures

    Key Factors Of The Russell 2000 Index

    The Russell 2000 index represents the small cap universe, with a broad selection of fast growth companies at the bottom end of the capitalization spectrum.

You May Also Like

Hot Definitions
  1. Fixed-Income Arbitrage

    An investment strategy that attempts to profit from arbitrage opportunities in interest rate securities. When using a fixed-income ...
  2. Venture-Capital-Backed IPO

    The selling to the public of shares in a company that has previously been funded primarily by private investors. The alternative ...
  3. Merger Arbitrage

    A hedge fund strategy in which the stocks of two merging companies are simultaneously bought and sold to create a riskless ...
  4. Market Failure

    An economic term that encompasses a situation where, in any given market, the quantity of a product demanded by consumers ...
  5. Unsystematic Risk

    Company or industry specific risk that is inherent in each investment. The amount of unsystematic risk can be reduced through ...
  6. Security Market Line - SML

    A line that graphs the systematic, or market, risk versus return of the whole market at a certain time and shows all risky ...
Trading Center