Inverse ETFs provides investors a positive return when the market declines. To use these index ETF to the maximum effect. Investors should be aware the underlying sector breakdown of the asset or market of each ETF. There are also sector inverse ETFs that move inverse to energy or financial sector ETFs. Prior bear markets saw the weakest sector in the index leading the decline. They fell more than the broader market.
As in the early technology bubble burst was led by the Technology sector (NASDAQ), the financial crises led by Banks and Brokerages and recent European sovereign crises led by European Equities. There are also inverse commodity ETFs such as Inverse Oil ETF or Inverse Silver ETF for those that has a bearish view on commodities.
The inverse index ETFs that tracks the main market index are:
Inverse Market ETF List
|S&P 500||ProShares Short S&P 500||SH|
|Russell 2000||ProShares Short Russell2000||RWM|
|Nasdaq||ProShares Short QQQ||PSQ|
|Actively Managed||Ranger Equity Bear ETF||HDGE|
|MidCap||ProShares Short MidCap400||NYY|
|Inverse Sector / Country ETF|
|NASDAQ Biotech Index||Ultrashort Biotechnology ETF||BIS|
The above ETFs are the best inverse ETFs to take advantage of falling markets. We highlight the sector breakdown of these 4 ETFs and one alternative actively managed ETF as well as the additional Inverse Sector and Country ETF. While most ETFs track a specific index. The manager of the actively managed ETF have discretion to add and reduce different exposures which index ETF does not.
For most of the market indexes listed below, there are also 2x and 3x versions that targets respective multiple of market declines which can be useful if investors are looking to use leverage in the portfolio. An important risk factor investors should be aware before investing in leveraged ETF is that most inverse leverage ETF look to mimic the return of the index for that day and daily returns are not compounded. Here is an good explanation of the long term affect of compounding on inverse leverage ETF.
|2x Leveraged Market Inverse ETF||Inverse ETF||Ticker|
|S&P 500||ProShares UltraShort S&P 500||SDS|
|Russell 2000||UltraShort Russell2000||TWM|
|3x Leveraged Market Inverse ETF||Inverse ETF||Ticker|
|S&P 500||UltraPro Short S&P500||SPXU|
|Russell 2000||UltraPro Short Russell2000||SRTY|
|Nasdaq||UltraPro Short QQQ||SQQQ|
Inverse S&P 500 Index ETF
ProShares Short S&P 500 (SH) track the inverse return of the S&P 500 index. The largest industry sector in the S&P 500 consist of the information technology stocks followed 6 sectors representing greater than 10% of the ETF in descending order of financials, health care, consumer discretionary and industrials, energy and consumer staples.
The sector index weight in the index is almost evenly distributed with 7 sectors comprises of 70% of the index. It is also the only index which has the health care industry highlighted separately.
Inverse Nasdaq 100 Index ETF
ProShares Short QQQ (PSQ) is the main index tracking the reverse returns of the Nasdaq 100 index (note weighting used from QQQ ETF). Primary difference of Nasdaq and S&P500 is that there are no financials included in the QQQ ETF and also not surprisingly it is technology heavy at 58% of the ETF. Technology, Health Care (Biotechs) and Consumer Discretionary comprise over 90% of the ETF.
Inverse Russell 3000 ETF
Investors looking for an inverse ETF that tracks a Russell 3000 can look no further than ProShares Short Russell2000 (RWM). With the underlying index including 3000 largest listed companies. The sector distribution is financials heavy (23%) followed by Consumer Staples (20%).
Actively Managed Inverse ETF
Ranger Equity Bear ETF (HDGE) can be an interesting inverse ETF option for investors that is looking for aa managed to actively manage the inverse ETF. The shorts equity position the fund holds are primarily in Technology, Financials and Consumer Discretionary. One point investors should note that the fee the ETF charges represent 3% of the AUM annually.
Inverse S&P MidCap 400 Index ETF
ProShares Short MidCap400 (MYY) is the smallest of 5 inverse market ETFs. Financials (22%), Industrials (18%) and Consumer Staples (17%) comprise the 3 largest sector of MMY. Compared to SH and PSQ, MMY also have a higher proportion of the ETF (almost 5% each) in Materials, Utilities and Telecom sectors. It the best inverse ETF for those would want mid capitalized listed stocks.
There are clear distinctions between each inverse market ETF. Inverse S&P 500 index is best in event that investors expect market to decline broadly across all sectors (although it has a financial bias). PSQ is the best inverse index if market decline is to be led by technology and biotech. RWM is for those looking to short small capitalized stocks rather than large capitalized heavy SH and PSQ. Similarly MMY for Mid capitalized companies. For those who want a quick way to get to an actively managed inverse ETF.
Like Mid Caps, Small Caps usually fall faster than the broader market. See our Small Cap ETF analysis to see the best Inverse Small Cap ETF.
Investors can also short the above inverse ETFs during bull market and invest the proceeds either in treasuries or as additional leverage in the portfolio. However this strategy using inverse ETF would be one of the riskier options.
Inverse Biotechnology ETF
Ultrashort Biotechnology ETF (BIS) allows investors to short the NASDAQ biotechnology index at 2x leverage. Investors can use BIS to express their bearish view on the sector. As it is a inverse and leverage ETF. Risk can be managed by allocating small than normal portfolio percentage to take into account the 2x leverage of the index.
With more than 150 stocks in the NASDAQ biotechnology index. The case for shorting the Biotechnology index rather than individual biotech stocks is that it eliminate individual stock risk. The thesis of shorting the whole sector is taking the viewpoint that the sector has run too hard, too fast and too overvalued.
Inverse Biotech ETF Performance