Although the stock market has been on an upswing for a number of years, it has been particularly volatile in 2018, thanks to increased trade war fears, plus a host of other factors. Contrarian investors who believe the overall long-term bull market is ripe for correction may wish to short stocks. One of the best ways to achieve this is by investing in an inverse exchange-traded fund (ETF). Sometimes referred to as "reverse equity ETFs", these funds make money when stocks drop in price. Consequently, if the index the fund follows dips 1%, the inverse ETF rises 1%.

The following four inverse ETFs are designed to capitalize on this strategy.

Key Takeaways

  • Those who envision a market correction may wish to short stocks.
  • One way to achieve this is by investing in an inverse exchange-traded fund (ETF).
  • Sometimes referred to as "reverse equity ETFs", these funds make money when stocks drop in price

1. ProShares Short S&P 500 (SH)

Using the S&P 500 as its benchmark, SH aims to match the performance of that index if it begins to plummet, 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). Bear in mind that an investment in this fund will lose money if stock prices ascend. This fund should be considered a short term play -- only to be used when you foresee a temporary decline in the market.

  • Avg. Volume:    2,933,929
  • Net Assets:    $1.31 billion
  • Yield:    0.49%
  • YTD Return:      -8.52%
  • Expense Ratio (net):      0.89%

2. ProShares UltraShort S&P 500 (SDS)

SDS is an aggressive fund that strives to achieve two times the inverse of the S&P 500. Its large-cap focus, coupled with its strategy of doubling the inverse of the index makes SDS a higher-risk ETF than the aforementioned SH fund. Using derivatives to achieve its goals, this fund is not a long-term play and was down single-digits for 2018.

  • Avg. Volume:    4,054,866
  • Net Assets:    $837.13 million
  • Yield:    0.67%
  • YTD Return:      -12.76%
  • Expense Ratio (net):      0.90%

3. ProShares UltraPro Short S&P 500 (SPXU)

As the most aggressive fund on our list, SPXU aims to achieve three times the inverse of the performance of the S&P 500 and carries the highest risk of the whole group. Consequently, if the market turns against investors, they could lose a lot of money--and fast. Therefore, those who take the plunge with this fund should watch it daily and stay abreast of any news affecting the broader market. This fund is perfect for making money quick, then abruptly dumping it at the first sign of a market recovery. With over 11 million shares changing hands every day, this is the most liquid of the four funds featured.

  • Avg. Volume:    3,826,207
  • Net Assets:    $870.36 million
  • Yield:    0.71%
  • YTD Return:      -17.83%
  • Expense Ratio (net):      0.90%

4. ProShares Short Russell2000 (RWM)

Tied to the Russell 2000, this ETF should be used by investors who expect small-cap stocks on the index to decline in price. It uses derivatives to only short one type of stock while remaining “long” in stocks from another index.

  • Avg. Volume:    323,385
  • Net Assets:    $242.16 million
  • Yield:    0.45%
  • YTD Return:      -12.46%
  • Expense Ratio (net):      0.95%

The Bottom Line

Given the longevity of the current bull market, we are likely to see a temporary pullback or a correction in the near future. Investors can profit by such downtrends, by investing in inverse ETFs that follow a broad index.