What Is an Inverse ETF?


Quick Answer

An inverse ETF is an exchange-traded fund that allows an investor to profit when the market takes a downturn. An inverse ETF moves in the opposite direction of the market index on which it is based.

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Full Answer

For instance, when the Nasdaq 100 Index, or the QQQ, goes up in value, the PSQ (an inverse ETF) goes down in value and vice versa. Inverse ETFs are not meant to be long-term investments. They are to be held only through the end of a short-term market decline.

Buying an inverse ETF is considered to be less complicated, less expensive, and less perilous than selling short a stock or an index fund. Buying an inverse ETF does not involve a margin account or interest charges on loaned shares. Plus, these funds can be purchased in retirement accounts and other tax-deferred investment accounts where selling a stock or fund short is not allowed.

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