Contrarian investors seeking to capitalize on stock market declines can profit during a bear market using an inverse exchange-traded fund(ETF). A bear market is typically defined as a situation where securities prices fall 20% or more from recent highs amid widespread investor pessimism. The spread of COVID-19 and its effect on investor sentiment triggered a collapse in securities prices earlier this year. Inverse ETFs are designed to make money when the stocks or underlying indexes they target go down in price. These funds make use of financial derivatives, such as index swaps, in order to make bets that stock prices will decline. Unlike shorting a stock, though, investors in inverse ETFs can make money when markets fall without having to sell anything short.
Key Takeaways
- The 2020 bear market lasted from February 19 to March 23, and the S&P 500's total return was -33.8% from peak to trough.
- The inverse ETFs with the best performance during the 2020 bear market were RWM, DOG, and HDGE.
- To achieve their inverse exposure, the first two ETFs make use of various swap instruments, and the third ETF holds short positions in different stocks.
The inverse ETF universe is comprised of about 10 ETFs, excluding leveraged ETFs and ETFs with less than $50 million inassets under management (AUM).The last bear market took place from February 19, 2020 to March 23, 2020, during which the total return for the S&P 500 was -33.8%. The best inverse ETF during the 2020 bear market, based on its total return between the two dates above, was the ProShares Short Russell 2000 (RWM). We examine the three best inverse ETFs of the 2020 bear market below. All numbers in this story are as of March 3, 2021.
Inverse ETFs can be riskier investments than non-inverse ETFs, because they are only designed to achieve the inverse of their benchmark's one-day returns. You should not expect that they will do so on longer-term returns. For example, an inverse ETF may return 1% on a day when its benchmark falls -1%, but you shouldn't expect it to return 10% in a year when its benchmark falls -10%. For more details, see this SEC alert.
ProShares Short Russell2000 (RWM)
- Bear market return: 55.4%
- Performance over 1-Year: -30.95%
- Expense Ratio: 0.95%
- Annual Dividend Yield: 1.20%
- Average Trading Volume: 2,085,612
- Assets Under Management: $254.83 million
- Inception Date: January 23, 2007
- Issuer: ProShares
RWM seeks to provide a daily return, before fees and expenses, that is -1x the daily performance of the Russell 2000 Index, an index which tracks the performance of the small-cap segment of the U.S. equity market. The ETF makes use of both ETF and index swaps to achieve its inverse exposure. Since the -1x exposure is for a single day, investors holding the fund for longer than a day will be exposed to compounding effects, causing returns to deviate from the expected inverse exposure.
ProShares Short Dow30 (DOG)
- Bear market return: 47.3%
- Performance over 1-Year: -20.44%
- Expense Ratio: 0.95%
- Annual Dividend Yield: 1.96%
- Average Trading Volume: 907,272
- Assets Under Management: $314.36 million
- Inception Date: June 19, 2006
- Issuer: ProShares
DOG aims to provide a daily return, before fees and expenses, that is -1x the daily performance of the Dow Jones Industrial Average (DJIA). The Dow is an index that tracks 30 large, publicly-owned blue chip companies on the New York Stock Exchange (NYSE). The ETF provides inverse exposure to these 30 stocks through the use of various swap instruments. Since the inverse exposure is daily, investors holding the fund for longer periods of time should not expect -1x performance. The fund uses DJIA swaps to obtain its inverse exposure.
AdvisorShares Ranger Equity Bear ETF (HDGE)
- Bear market return: 47.3%
- Performance over 1-Year: -43.48%
- Expense Ratio: 3.36%
- Annual Dividend Yield: 0.27%
- 3-Month Average Daily Volume: 1,093,326
- Assets Under Management: $56.81 million
- Inception Date: January 26, 2011
- Issuer: AdvisorShares
HDGE seeks to achieve positive returns by shorting stocks listed on U.S. exchanges. The ETF uses a combination of quantitative and fundamental factors in order to build a portfolio of equities to short. Good candidates are stocks of firms with low earnings quality or aggressive accounting practices. However, shorting stocks is expensive, which results in high ETF fees. The fund's three biggest shorts are Canon Inc. (CAJ), a Japan-based manufacturer of copying machines, printers, cameras, and lithography equipment; Pros Holdings Inc. (PRO), a provider of business software services; and Snap-On Inc. (SNA), a tool and equipment manufacturer.
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FAQs
The inverse ETFs with the best performance during the 2020 bear market were RWM, DOG, and HDGE. To achieve their inverse exposure, the first two ETFs make use of various swap instruments, and the third ETF holds short positions in different stocks.
What is the best inverse ETF to buy? ›
7 best-performing inverse ETFs of 2024
| Ticker | ETF Name | 1 month return |
|---|
| TSLQ | AXS TSLA Bear Daily ETF | 13.95% |
| TSLS | Direxion Daily TSLA Bear 1X Shares | 13.93% |
| LABD | Direxion Daily S&P Biotech Bear 3x Shares | 13.47% |
| KOLD | ProShares UltraShort Bloomberg Natural Gas | 11.99% |
3 more rowsApr 2, 2024
Yes, an inverse ETF can reach zero, particularly over long periods. Market volatility, compounding effects, and fund management concerns can exacerbate losses. To successfully manage possible risks, investors should be aware of the short-term nature of these securities and carefully monitor their holdings.
Who would be the most likely to buy an inverse ETF? ›
Contrarian investors use inverse ETFs to profit from the decline in value of a given index or asset class, such as an index. Professional traders may use them to hedge against declines in their other positions.
What funds do well in a bear market? ›
What is the best strategy in a bear market? A potential strategy in a bear market (or any market) is to buy and hold stocks from major index funds like the S&P 500. Data from Crestmont Research shows that S&P 500 returns in any 20-year period from 1919 to 2022 were positive.
How long should you hold an inverse ETF? ›
Inverse ETFs aren't for long term investors since they are designed to be held for a period of not more than a day.
What is the largest inverse ETF? ›
The largest Inverse ETF is the ProShares UltraPro Short QQQ SQQQ with $3.38B in assets. In the last trailing year, the best-performing Inverse ETF was KOLD at 131.72%. The most recent ETF launched in the Inverse space was the ProShares UltraShort Bitcoin ETF - SC - United States SBIT on 04/02/24.
What is the problem with inverse ETF? ›
Compounding Risk
Since an inverse ETF has a single-day investment objective of providing investment results that are one times the inverse of its underlying index, the fund's performance likely differs from its investment objective for periods greater than one day.
Can you lose money on inverse ETF? ›
Inverse or leveraged ETFs typically try to track the daily performance of their target asset. So, holding this kind of asset over a long period of time could compound losses. And the higher the leverage of an inverse ETF, the greater the potential decay of value due to its structure.
Why are inverse ETFs bad for long term? ›
Inverse ETFs aren't intended for long-term bearish movements or for hedging your portfolio against longer-term downswings because of the disadvantage of daily rebalancing.
Short-Term Products
Investors can hold the ETF for longer than a day, but returns can vary significantly from 2x exposure over longer periods. That's because the ETF resets its leverage daily. In oscillating markets, the leverage reset can significantly erode returns. A lot.
Can you lose more than you invest in an inverse ETF? ›
If you buy an inverse ETF and the market associated with your fund rises, you will lose money. If the fund is leveraged, you could experience dramatic losses. Market downturns and bear markets are entirely different than rising markets.
What is the 2x inverse spy? ›
The S&P 500® 2X Inverse Daily Index provides two times the inverse performance of the S&P 500, widely regarded as the best single gauge of the U.S. equities market. This index was designed to assist investors who are seeking a short position on U.S. equities.
What to buy at the bottom of a bear market? ›
Think about the things consumers will need no matter what – those are the sectors that tend to perform well during market downturns. Even amid high inflation, people still need gas, groceries and health care, so things such as consumer staples and utilities usually weather bear markets better than others.
How much cash should I have in a bear market? ›
For instance, a 10% market decline for a fully invested portfolio will result in a loss of the full 10%. By reducing the market exposure to 80% with a 20% cash position, the same market loss results in a portfolio loss of only 8%.
Where do you put cash in a bear market? ›
Government bonds and defensive stocks historically perform better during a bear market. However, most people investing for the long term shouldn't be aggressively tweaking portfolios every time there is a sell-off.
Are inverse ETFs a good investment? ›
Inverse ETFs carry many risks and are not suitable for risk-averse investors. This type of ETF is best suited for sophisticated, highly risk-tolerant investors who are comfortable with taking on the risks inherent to inverse ETFs.
Are inverse ETFs a good idea? ›
Because of how they're created, though, the value of these ETFs tends to decay over time. Inverse or leveraged ETFs typically try to track the daily performance of their target asset. So, holding this kind of asset over a long period of time could compound losses.
What are the cons of inverse ETF? ›
A big disadvantage of inverse ETFs
Volatility loss describes the effect of volatility on total returns. An investor can be directionally accurate in their assessment that the underlying security will decline in value but still lose money by investing in an inverse ETF.
Is SQQQ a good investment? ›
SQQQ Signals & Forecast
The SQQQ ETF holds a sell signal from the short-term Moving Average; at the same time, however, there is a buy signal from the long-term average. Since the short-term average is above the long-term average there is a general buy signal in the ETF giving a positive forecast for the stock.
