What Are Inverse ETFs?


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Video Transcription:

Hello, traders. Welcome to the stock trading course and the fifth module, Day Trading ETFs. In this lesson, we are going to learn everything about inverse ETFs and this is where ETF, or trading ETF, becomes very interesting.

Let’s start by defining what an inverse ETF is. And what are inverse ETFs? Well, this is an ETF that is constructed for the purpose of profiting from a decline in the value of an underlying benchmark. So, buying these ETFs is similar to holding short position. This is why they are called short ETFs or bear ETFs.

Short ETFs can also be leveraged. This means that they can not only profit from declining the price of the underlying benchmark but also multiply these returns. Now, this is very interesting because sometimes, it’s going to be very hard to short sale an asset or a security. And most of the time, there’s not going to be availability to short sale an ETF so what you are going to do is you are going buy an inverse ETF to bet on a negative move in a security or a benchmark.

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Now, this is impressive and actually, I like it a lot because not only you can do this by buying ETFs at a low cost but you can also multiply your profits by buying bear leveraged ETFs. Now, here is a list of the bear leveraged ETFs that we are going to trade. First of all, the SPXS, which is the direction daily, S&P 500 bear ETF that tracks the inverse movement of the S&P 500 by three times. D-U-S-T or DUST, which is the direction daily gold miners bear shares ETF, that tracks the price of gold on inverse correlation by three times. FAZ or F-A-Z, which is the direction daily financial bear 3X shares, that tracks inversely the banking sector by three times. SCO, ProUltra shares, ultra-short oil ETF, which is great if you want to short crude by buying ETFs. TQQQ, which is ProShares UltraPro QQQ ETF that tracks three times the inverse NASDAQ 100 index and TZA, which is a daily small cap bear shares that tracks the small cap companies on an inverse correlation by three times.

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Now, I’m going to go again to the charts and I’m going to show you a chart of the S&P 500 and a chart of the SPXS. Okay, so here is the S&P 500 chart on a bar chart and on the line chart, we have the SPXS ETF and as you can see, it’s negatively correlated to the S&P 500 and it moves, all returns are amplified vis-à-vis the index. Now, I’m going to show you, for example, because this is a bear ETF, we are going to be buying this ETF when the S&P 500 is falling. So, I’m going to show you this decline in the S&P 500, okay? From this high to this low, the S&P 500 lost 11.38% of its value. Now, you can see that the SPXS was clearly not in play until the [inaudible 00:04:07] decline in the S&P 500.

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Now, here is a chart, a bar chart of the SPXS and here is this rally on this ETF. You can see that the ETF returned 44.26% on the same period of time and on the same move of the S&P 500 when the S&P 500 lost 11.38%. So, this is why inverted level ETFs are so powerful as well as leveraged and normal ETFs but, I mean, you have so much range when it comes to ETFs and so many plays that you can decide to trade that it’s very interesting at the…or to add them to your stock trading watch list.

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