ETFs are Exchange-Traded Funds.
There are ETFs of all specialties.
Today, we are reviewing some ETFs in the “inverse ETF.”
These are funds that go up when an underlying asset goes down.
And they go down when an underlying asset goes up.
Contents
Starting with the inverse ETF with the symbol “SH,” which is the ProShares Short S&P500 fund. This fund aims to provide the inverse of the daily performance of the S&P 500 Index (with the symbol SPX).
For example, from the close of July 1st, 2024, to the close of July 2nd, 2024, the SPX went up 33.92 points, or 0.62%, from 5475.10 to 5509.02.
During that same time, SH went down from 11.39 to 11.32, or 0.62% – the same percentage amount but in the opposite direction.
Why would someone buy a fund that goes down?
They wouldn’t if they knew that SPX would go up.
They would invest in the fund when they thought SPX would go down, as in the case of a hypothetical investor who had purchased 168 shares of SH on the close of April 1st, 2024, and sold it on the close of April 19th, 2024.
During that time, SH went up $0.71 from $11.88 to $12.59, or up 6%.
The investor profits $119 from those 168 shares, representing $2000 worth of capital invested.
An SPY investor during that same period would have lost money.
SPY is the ETF that tracks the S&P 500. It is not an inverse ETF.
SPY goes up when the S&P 500 goes up, and vice versa.
However, since investors can not buy shares of SPX, they buy shares of the SPY exchange-traded fund, which is about one-tenth the size of SPX.
During that same period, SPY dropped $27 from $522.16 to $495.16.
With four shares (or about $2000) invested, the SPY investor lost $108.
In theory, the loss of the SPY investor would be the same as the gain of the SH investor.
As the common saying goes:
“In theory, there is no difference between theory and practice, while in practice, there is.”
The author of the original quote is often misattributed and largely unknown.
However, quoteinvestigator.com gives credit to a Yale University student named Benjamin Brewster.
In practice, the SPY investor and SH could not have invested exactly the same amount of capital due to the inability to buy fractional shares.
That, in addition to calculation rounding, would account for the difference.
Leveraged Inverse ETF
The SH is an unleveraged inverse ETF. The SPXU is a three-times leveraged inverse ETF of the SPX.
This symbol is easy to remember because you can think of the “U” in “SPXU” as “upside-down.”
The chart of SPXU looks like an upside-down image of SPX.
An investor of SPXU during that same time would have profited 15% because SPXU went up 5.78 from 32.55 to 38.33.
It makes about three times the profit and takes three times the loss as the unleveraged product (such as the SH).
There is also the two-time leveraged inverse ETF of the S&P 500.
Its symbol is SDS, a rather difficult one to remember.
Inverse ETF Of Other Underlyings
Besides the S&P 500, there are inverse ETFs for popular underlying such as the Nasdaq, Dow, and Russell 2000.
Summary Of Common Inverse ETFs:
SH – one-time inverse ETF of the S&P 500
SDS – two-times inverse ETF of the S&P 500
SPXU – three-times inverse ETF of the S&P 500
PSQ – one-time inverse ETF of the Nasdaq-100
QID – two-time inverse ETF of the Nasdaq-100
SQQQ – three-time inverse ETF of the Nasdaq-100
DOG – one-time inverse ETF of the Dow Jones Industrial Average
DXD – two-time inverse ETF of the Dow Jones Industrial Average
SDOW – three-time inverse ETF of the Dow Jones Industrial Average
RWM – one-time inverse ETF of the Russell 2000 Index
TWM – two-time inverse ETF of the Russell 2000 Index
SRTY – three-time inverse ETF of the Russell 2000 Index
We hope you enjoyed this article on the most common inverse ETFs.
If you have any questions, please send an email or leave a comment below.
Trade safe!
Disclaimer: The information above is for educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are not familiar with exchange traded options. Any readers interested in this strategy should do their own research and seek advice from a licensed financial adviser.
