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Contrarian investors seeking to capitalize on stocks market declines, can profit during a bear market using an inverse exchange-traded fund (ETF). These funds are designed to make money when the stocks or underlying indexes they target go down in price. Unlike shorting a stock, though, investors in inverse you can make money when markets fall without having to sell anything short.

Here, we look at 3 popular inverse ETFs that track major U.S. indices. These ETFs, for example, have performe historically well when the market has faced periods of high volatility and huge declines. These include the ProShares Short QQQ (PSQ), The Direxion Daily S&P 500 Bear ETF (SPDN), and the ProShares Short S&P 500 (SH). All figures noted below are as of April 3, 2020.

Key Takeaways

  • Inverse ETFs allow investors to make money when the market or the underlying index declines, but without having to sell anything short.
  • As a result, Inverse ETFs that negatively track stock market indexes are popular options during a market crash or prolonged bear market.
  • Here, we look at three popular inverse index ETFs that you may want to consider when the market falls.

1. ProShares Short QQQ (PSQ)

  • Return During the 2018 Correction: 26.2%
  • Expense Ratio: 0.95%
  • Annual Dividend Yield: 1.5%
  • 3-Month Average Daily Volume: 9.1 million shares
  • Assets Under Management: $486 million
  • Inception Date: June 21, 2006
  • Issuing Company: ProShares

The ProShares Short QQQ fund is a large-cap ETF offering inverse exposure to an index of the largest 100 nonfinancial securities from the NASDAQ. Exposure resets on a monthly basis. PSQ's top holdings are Apple, Inc. (AAPL) and Microsoft Corp. (MSFT), as well as e-commerce titan Amazon.com Inc. (AMZN).

According to ETF.com, "PSQ makes a straight bet against the extremely popular ETF QQQ by providing inverse exposure to the Nasdaq-100, a 100-company index of firms listed on the tech-heavy NASDAQ that excludes financial firms. PSQ uses a combination of swaps on the Nasdaq-100 index, swaps on QQQ, and Nasdaq-100 futures to achieve this exposure. As with most inverse and leveraged products, PSQ is designed to provide this exposure on a daily basis, not as a long-term inverse bet against the index."[cite]

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

  • Return During the 2018 Correction: 24.0%
  • Expense Ratio: 0.50%
  • Annual Dividend Yield: 1.13%
  • 3-Month Average Daily Volume: 289,000 shares
  • Assets Under Management: $101 million
  • Inception Date: June 8, 2016
  • Issuing Company: Direxion

The Direxion Daily S&P 500 Bear 1X ETF is an inverse equities fund tracking the S&P 500 Index. This multi-cap fund is relatively equally weighted and is designed to provide 1x inverse exposure to one of the most popular indexes among investors. The top three holdings are currently Lumentum Holdings Inc. (LITE), the optical products maker; Trex Company Inc. (TREX), manufacturer of outdoor materials and items; and Palomar Holdings Inc. (PLMR), the insurance company.

According to ETF.com. "SPDN provides a 1-day bet against the S&P 500. Like most geared ETFs, the fund is designed to deliver its inverse exposure to the underlying index for one trading day only. Holding it for a period longer than that will introduce the effects of compounding, even if this is less pronounced than in a leveraged ETF product. As such, SPDN is inherently a short-term tactical play."[cite]

3. ProShares Short S&P 500 (SH)

  • Return During the 2018 Correction: 23.8%
  • Expense Ratio: 0.89%
  • Annual Dividend Yield: 1.28%
  • 3-Month Average Daily Volume: 20.5 million shares
  • Assets Under Management: $3.3 billion
  • Inception Date: June 21, 2006
  • Issuing Company: ProShares

Using the S&P 500 as its benchmark, SH aims to profit by as much as the benchmark index declines by investing in derivatives, that may include futures contracts, swaps, and stock options. The fund focuses on the behavior of large-cap stocks but also watches real estate investment trusts (REITS). The top holdings are Microsoft Corp. (MSFT), Apple Inc. (AAPL), and Amazon.com Inc. (AMZN).

According to ETF.com, "SH offers a 1-day bet against the S&P 500 and provides the liquidity required to allow investors to use it as such. The fund, like most leveraged and inverse products, is designed to deliver its inverse exposure to its underlying index—a cap-weighted basket of 500 large- and midcap US firms selected by the S&P Index Committee—for 1 trading day. Holding it for a period longer than that will introduce the effects of compounding, even if this is less pronounced in a non-leveraged product. Still, the tool is designed to be held for no more than 1 day."[cite]