Inverse ETFs move in the opposite direction of major indexes like the S&P 500 or Dow Jones Industrial Average. By buying an inverse ETF, you can protect yourself and/or profit from a decline in the major indexes or bet on a bear market, as these ETFs will appreciate in value as markets decline.
Traders who believe bear markets lay ahead, but only in specific corners of the market, can look to sector inverse ETFs that will increase in value as the stocks in that sector fall. Many of the inverse sector ETFs also are leveraged, meaning they not only seek to provide an inverse return, but one that is multiplied by 2x or even 3x its benchmark.
Below are three examples of inverse sector ETFs to show how they operate. These examples are meant to be illustrative of the concept of inverse sector ETFs and should be construed as investment advice.
- An inverse ETF is an exchange-traded fund (ETF) constructed by using various derivatives to profit from a decline in the value of an underlying benchmark.
- Inverse ETFs allow investors to make money when the market or the underlying index declines, but without having to sell anything short.
- Sector inverse ETFs rise when stocks in a particular industry group fall.
- Inverse ETFs can be a risk due to their use of leverage. They may also carry higher fees than traditional ETFs.
Launched in early 2010, the Direxion Daily Semiconductor Bear 3X ETF (SOXS) seeks to provide three times the inverse daily performance PHLX Semiconductor Sector Index (SOX), a market-cap-a capitalization-weighted index composed of 30 semiconductor companies—making it ideal for traders who want to make an aggressive bet against the semiconductor sector. SOXS takes bearish positions in the highly-concentrated semiconductor industry by using swaps agreements, futures contracts, and short sales.
With an expense ratio of 1.08% and assets of $117 million (as of Q2 2021), the SOXS portfolio is dominated by its top ten names, making the fund an explicit bet against a relative handful of companies. The fund rebalances its exposure on a daily basis, making long-term returns difficult to predict due to the effects of path dependency and compounding.
The ProShares UltraShort Financials ETF (SKF), created in 2007, aims to return two times the inverse daily performance of the DJ Global United States (All) / Financials Index. The fund offers a play against major U.S. banking, insurance, real estate, and investment companies, such as Bank of America Corporation (BAC) and Berkshire Hathaway Inc. (BRK.B). It carries a management fee of 0.95% with assets of $12.5 million
SKF is not designed to be a long-term investment product because of its daily rebalance. SKF gets the added exposure by using derivatives and money market instruments. As a result, there is a lack of predictability in the fund's long-term returns.
Launched in 2010, the ProShares UltraShort Nasdaq Biotech ETF (BIS) attempts to provide twice the inverse exposure to NASDAQ-listed biotechnology and pharmaceutical companies. The fund tracks the NASDAQ Biotechnology Index. BIS has a sizable average spread of 0.23%, making it more suited to swing trading than day trading. As of June 2021, the ETF charges a 0.95% management fee.
The fund typically holds derivatives and money market instruments. Like other inverse and leveraged ETFs, BIS is intended to be a tactical tool, it is not a buy-and-hold investment and should not be expected to provide index leverage returns greater than a one-day period.