an inverse etf is an exchange traded fund etf constructed by using various derivatives to profit from a decline in the value of an underlying benchmark investing in inverse etfs is similar to holding various short positions which involve borrowing securities and selling them with the hope of repurchasing them at a lower price 
an inverse etf is also known as a short etf or bear etf understanding inverse etfsmany inverse etfs utilize daily futures contracts to produce their returns a futures contract is a contract to buy or sell an asset or security at a set time and price futures allow investors to bet on the direction of a securities price inverse etfs use of derivatives like futures contracts allows investors to make a bet that the market will decline if the market falls the inverse etf rises by roughly the same percentage minus fees and commissions from the broker 1inverse etfs are not long term investments since the derivative contracts are bought and sold daily by the fund s manager as a result there is no way to guarantee that the inverse etf will match the long term performance of the index or stocks it is tracking frequent trading often increases fund expenses and some inverse etfs can carry expense ratios of 1 or more 12inverse etfs allow investors to make money when the market or the underlying index declines inverse etfs can help investors hedge their investment portfolio there are multiple inverse etfs for many of the major market indices inverse etfs can lead to losses quickly if investors bet wrong on the market s direction inverse etfs held for more than one day can lead to losses higher fees exist with inverse etfs versus traditional etfs inverse etfs vs short sellingan advantage of inverse etfs is that they do not require the investor to hold a margin account as would be the case for investors looking to enter into short positions a margin account is one where a broker lends money to an investor to trade margin is used with shorting an advanced trading activity 3investors who enter into short positions borrow the securities they don t own them so that they can sell them to other traders the goal is to buy the asset back at a lower price and unwind the trade by returning the shares to the margin lender however there is the risk that the value of the security rises instead of falling which means the investor has to buy back the securities at a higher price than the original margined sale price in addition to a margin account short selling an etf requires a stock loan fee paid to a broker for borrowing the shares necessary to sell short stocks with high short interest may make it difficult to find shares to be short which drives up the cost of short selling in many cases the cost of borrowing shares to short can exceed 3 of the borrowed amount which is why inexperienced traders can quickly get in over their heads conversely inverse etfs often have expense ratios of less than 2 and can be purchased by anyone with a brokerage account 2 despite the expense ratios it is still easier and less costly for an investor to take a position in an inverse etf than to sell individual stocks short types of inverse etfsthere are several inverse etfs that can be used to profit from declines in broad market indexes such as the russell 2000 or the nasdaq 100 there are also inverse etfs that focus on specific sectors such as financials energy or consumer staples some investors use inverse etfs to profit from market declines while others hedge their portfolios against falling prices for example investors who own an etf that matches the s p 500 can hedge declines in the s p by owning an inverse etf for the s p however hedging has risks as well if the s p rises investors might have to sell their inverse etfs since they will incur losses that could offset any gains in their original s p investment inverse etfs are short term trading instruments that must be timed perfectly for investors to make money there s a significant risk of losses if investors allocate too much money to inverse etfs and time their entry and exit poorly double and triple inverse etfsa leveraged etf is a fund that uses derivatives and debt to magnify the returns of an underlying index typically an etf s price rises or falls on a one to one basis compared to the index it tracks a leveraged etf is designed to boost the returns to 2 1 or 3 1 compared to the index leveraged inverse etfs use the same concept as leveraged products and aim to deliver a magnified return when the market is falling for example if the s p has declined by 2 in a day a 2x leveraged inverse etf will deliver a 4 positive daily return to the investor excluding fees and commissions 1real world example of an inverse etfproshares short s p 500 sh provides inverse exposure to large and midsize companies in the s p 500 it had an expense ratio of 0 88 and about 1 93 billion in net assets as of q4 2023 4 the inverse etf aims to provide a one day trading bet and is not designed to be held for more than one day on nov 2 2023 the s p rose 1 07 and as a result shares of sh fell 1 07 in turn from 14 88 to 14 72 if investors had been invested in the sh during that up day in the market they would have realized losses 5