Inverse ETF or Short ETF : NobleTrading Blog

Wednesday, December 10, 2008

Inverse ETF or Short ETF

Inverse Exchange Traded Funds (ETFs), also known as Short ETFs and Bear ETFs, are exchange traded funds which moves just against the index it is tracking. These ETFs are carefully constructed using derivatives or they follow complex advanced trading strategies to profit from the declining of falling markets. There are also ultra invest ETFs which offer double (or more than that) return.

Short ETFs are newer to the markets. Now there are more than 35 inverse ETFs available for trading, which track indexes (e.g.: Short QQQ, Short Dow, UltraShort S&P), market sectors (e.g.: UltraShort Industrials, UltraShort Financials), and international/foreign markets (e.g.: Short MSCI Emerging Markets, UltraShort MSCI Japan). There are both advantages and disadvantages of trading invest ETFs over other instruments and over short trading.

Advantages of Short ETF

Inverse ETF allow traders to profit from falling markets.
Inverse ETF allow traders to go short without a margin account.
Inverse ETF allow investors to hedge their portfolio against market falls.

Disadvantages of Short ETFs

Short ETF is not a good choice in rising markets; and they tend to offer lesser return in long-term as most indexes tend to rise in long-term.
Profiting from short ETF require market timing, and are not so suitable for novice investors/traders.
The active management costs of short ETFs make them more expensive; especially for Ultra shots.
Short ETFs are newer instruments, and no sufficient performance history is available.