When it comes to investments with exotic sounding names, it’s hard to beat inverse-leveraged exchange-traded funds.
Then again, it’s also hard to beat them when the market is sinking.
Given their potential for performing well in down markets, it’s worth knowing what they are and how to use them.
Our next post will explain exchange-traded funds (ETFs). Put what about that “inverse-leveraged” part?
An inverse fund moves in the opposite direction from the underlying securities. For example, an inverse fund for the S&P 500 would move up when the S&P 500 moves down. Unfortunately, of course, it would move down when the S&P 500 moves up.
If the inverse fund is also leveraged, it will move farther. For example, if the fund is “double-beta” leveraged and inverse, it will move up two points for every point the underlying securities move down. That’s great if the market is dropping in value, but you won’t be too happy if the market jumps 200 points and your ETF drops 400 points.
Inverse-leveraged ETFs can be risky, but they can also help reduce risk if they are used as part of a hedging strategy. Consider that having a percentage of your investments in an inverse-leveraged ETF can balance losses in the rest of your portfolio if the market drops in value. As such, they can reduce the overall risk in your portfolio.
Conversely, day traders are also using them to speculate on market movements or the movement of specific sectors.
Regardless, inverse-leveraged ETFs, as well as inverse ETFs and leveraged ETFs, are proliferating rapidly. ProFunds introduced the first six leveraged and inverse international ETFs, and registered another 48 inverse and leveraged commodity and currency ETFs. Rydex, which already has similar offerings, has added a half dozen of an expected 55 inverse and leveraged domestic ETFs that are based on specific investment styles and sectors.