There are times when a bearish bet against the Standard and Poor's 500 Index (S&P 500) can be appropriate. One way to do this is buying into an exchange-traded fund (ETF) that rises in price when the S&P 500 falls in price. These types of bearish ETFs are also known as inverse ETFs.

If you are looking for an inverse SPY ETF, ProShares has you covered. ProShares offers ETFs designed to short the S&P 500, including the Short S&P 500 ETF (SH), UltraShort S&P 500 ETF (SDS), and Ultra VIX Short-Term Futures ETF (UVXY).

KEY TAKEAWAYS

  • The price of the ProShares Short S&P 500 ETF (SH) moves inversely with the price of the S&P 500 each day.
  • The ProShares UltraShort S&P 500 ETF (SDS) moves twice as much as the S&P 500 each day, but it goes in the opposite direction.
  • The ProShares Ultra VIX Short-Term Futures ETF (UVXY) increases in value when the volatility of the S&P 500 rises, which usually happens during bear markets.
  • Investors who are bearish for the long run are better off with gold ETFs or government bond ETFs.

Compounding Effect

Leveraged inverse ETFs are similar to inverse ETFs. Leveraged inverse ETFs are designed to produce multiples of the inverse one-day performance of stock indexes, such as the S&P 500. They also reset daily, which results in a compounding effect that can be beneficial if the S&P 500 makes consecutive day-to-day declines. However, compounding can lead to losses if volatility causes inconsistent up-and-down days.

Leveraged inverse ETFs can lose money in bear markets due to high volatility.

Because of compounding, investors should determine how long they plan on holding inverse ETFs and focus on short-term trades. In general, the effects of compounding can take a toll if these ETFs are kept for longer than a week in a choppy market. If the market consistently sells off, then the compounding effect can improve the performance. Investors who are bearish for the long run are better off with gold ETFs or government bond ETFs.

ProShares Short S&P 500 ETF

The ProShares Short S&P 500 ETF (SH) began in June 2006. The fund aims to mirror the one-day performance of the S&P 500 by a factor of negative 1x. If the S&P 500 rises 2%, then SH should fall 2%, minus the annual expense ratio of 0.89%. The average daily volume of the ProShares Short S&P 500 inverse ETF was 2.81 million shares as of December 2019, according to ProShares.

ProShares UltraShort S&P 500 ETF

The ProShares UltraShort S&P 500 ETF (SDS) launched in July 2006. SDS delivers double the price movements and volatility of SH. This leveraged inverse ETF was designed to mirror the one-day performance of the S&P 500 by a factor of negative 2x. If the S&P 500 falls 2%, SDS should rise 4%, minus the annual expense ratio of 0.89%. As of December 2019, the average daily volume of the ProShares UltraShort S&P 500 ETF was 2.94 million shares. The extra leverage tends to attract speculators looking to get more bang for their buck.

ProShares Ultra VIX Short-Term Futures ETF

Aggressive investors and traders looking for more risk and more significant price swings may consider the ProShares Ultra VIX Short-Term Futures ETF (UVXY). This leveraged inverse ETF mirrors the S&P 500 Volatility Short-Term Futures Index (VIX) by a factor of 1.5x. The VIX is often considered the fear index, as it tracks the implied volatility of S&P 500 options. Traders use this popular tool as a method of short selling the S&P 500 on a one-day time frame. UVXY tends to move inversely with the S&P 500 most of the time.

Traders will find it best to invest in this ETF during volatile market sessions where the S&P 500 trades in a price range greater than 2%. During periods of substantial volatility, UVXY can experience price gains or losses of up to 4x those of the S&P 500. UVXY benefits directly from the volatility of bear markets, while volatility tends to reduce the returns of SDS. As of December 2019, UVXY traded an average of 10.40 million shares daily, according to ProShares. The fund had an expense ratio of 0.95%.