What are inverse ETFs?


Quick Answer

Inverse ETFs are exchange-traded funds that generate profits in the direction opposite to the value of the underlying assets or derivatives. This means that if the underlying index decreases in value by 5 percent, the inverse ETF makes a profit of 5 percent. Inverse ETFs are designed to deliver daily returns on the changes in value of the underlying assets, but they do not provide consistent returns over the long-term.

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Full Answer

The major advantage of inverse ETFs is that they allow a trader to make daily returns when asset prices fall. While inverse ETFs do not require traders to hold margin accounts, which is a requirement when shorting investments, they function exactly the same as short positions. This makes them ideal for traders who are unable to open shorting accounts but want a short position on an asset.

A significant disadvantage associated with inverse ETFs is their low popularity, which sometimes results in a lack of liquidity. A trader should consider purchasing inverse ETFs as a hedge against investments in industries where the trader has identified the existence of a downside risk. Another reason for buying inverse ETFs is their ability to help a traders limit their risk while offering all the benefits of a short position.

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