Nasdaq Inverse ETFs Explained

Nasdaq Inverse ETFs are designed to move in the opposite direction of the Nasdaq index, meaning they'll go up when the index goes down and vice versa. This is achieved through a variety of strategies, including short selling and derivatives.

The goal of an inverse ETF is to provide a daily return that's the inverse of the Nasdaq index's return. For example, if the Nasdaq index falls by 1%, the inverse ETF will rise by 1%. This can be a useful tool for traders looking to hedge their bets or profit from a market downturn.

Inverse ETFs are not suitable for all investors, particularly those who are new to the market or risk-averse. They can be volatile and may not always perform as expected.

Leveraged & Inverse ETFs are a type of investment product that allows you to gain exposure to a particular market or asset class, but with a twist. They use financial derivatives to amplify the returns of the underlying asset, but also come with a higher level of risk.

To understand how they work, let's break down the key components. According to the Direxion ETFs page, there are several categories to explore, including Overview, Performance, Pricing, and Distributions.

The performance data for these funds is based on past results, which doesn't guarantee future performance. In fact, the investment return and principal value of an investment will fluctuate, and an investor's shares may be worth more or less than their original cost.

Here are some key things to keep in mind when considering Leveraged & Inverse ETFs:

It's essential to understand that these funds are not suitable for all investors, and you should carefully review the prospectus and other materials before investing.

Direxion leveraged investments can be a bit complex, but let's break it down. Past performance does not guarantee future results, so it's essential to keep that in mind.

The investment return and principal value of an investment will fluctuate, which means your shares may be worth more or less than their original cost when redeemed. This is a normal aspect of investing.

For Direxion Shares, shares are bought and sold at market price, not net asset value (NAV). This can result in brokerage commissions reducing your returns. Fund returns assume dividends and capital gains distributions have been reinvested in the fund at NAV.

Some performance results reflect expense reimbursements or recoupments and fee waivers in effect during certain periods shown. This can make the fund's performance look better than it would be without these reimbursements or recoupments and fee waivers.

Here are the key areas to focus on when evaluating Direxion leveraged investments:

Inverse ETFs work by seeking to deliver a return that is the opposite of the daily performance of a specific index or benchmark. They track broad-market indexes, specific sectors, or other types of benchmarks, betting against the actual direction of that benchmark.

To generate an inverse return, inverse ETFs buy derivatives such as swap agreements, futures contracts, and money market instruments. For example, the ProShares Short S&P 500 (SH) inverse ETF buys derivatives to generate an inverse return from the S&P 500's daily performance.

The fund rebalances its portfolio daily to maintain its exposure to the index and its inverse return. This is done to ensure that the fund's value decreases when the index trades up and increases when the index trades down.

Inverse ETFs can be categorized into two main types: those that use derivatives and those that use physical replication.

Inverse ETFs that use derivatives, such as the ProShares Short S&P 500 ETF, typically use futures contracts or options to track their underlying index.

These derivatives are often more cost-effective than physical replication, but can also be more volatile.

Inverse ETFs that use physical replication, on the other hand, hold a basket of stocks that are inversely correlated to the underlying index.

For example, the Direxion Daily Small Cap Bear 3X Shares ETF holds a basket of short positions in small-cap stocks.

This approach can be more expensive, but provides a more direct way to track the underlying index.

Inverse ETFs can also be categorized by their investment objective, such as total return or income generation.

Some inverse ETFs aim to track a specific sector or geographic region, such as the VanEck Vectors Oil Service ETF.

Others may focus on a specific investment strategy, such as momentum or value investing.

Inverse ETFs can also be classified by their risk level, with some offering a more conservative approach and others being more aggressive.

The ProShares Short S&P 500 ETF, for example, is designed to be a more conservative inverse ETF.

In contrast, the Direxion Daily Small Cap Bear 3X Shares ETF is a more aggressive inverse ETF.

Inverse ETFs work by seeking to deliver a return that is the opposite of the daily performance of a specific index or benchmark.

The fund manager uses a combination of debt, derivatives, and sometimes equity to achieve this inverse return, as seen in the ProShares Short S&P 500 (SH) inverse ETF.

To generate an inverse return, the fund buys derivatives such as swap agreements, futures contracts, and money market instruments like U.S. Treasury bills and repurchase agreements.

These derivatives allow the fund to pay the returns of the index to a counterparty, which can cause the value of the ETF to decrease if the index trades up.

The fund rebalances its portfolio daily to maintain its inverse return to the index, ensuring its exposure remains consistent with its daily target.

Inverse ETFs are generally used as short-term investments due to factors such as contract premiums, borrowing costs, and margin utilization.

Some inverse ETFs that use options and futures contracts must roll-over or close their positions due to expiring contracts, which can result in underperformance over longer time periods.

These funds usually do not track exact inverse or opposite returns of their respective non-inverse ETFs over longer time periods.

Inverse ETFs are an inverse bet against the actual direction of a benchmark, allowing investors to profit from a negative outcome, similar to shorting a stock.

Inverse ETFs offer a unique way to trade in registered accounts, such as a TFSA or RRSP, where you can't normally short sell a security to profit from a decline in share price.

One of the main advantages of inverse ETFs is the ability to gain short exposure in registered accounts, allowing you to profit off a decline in price of an index or other underlying asset.

Inverse ETFs can be used as a hedging tool to "protect" other parts of your portfolio against declines in common asset classes or indices.

However, they may have higher than average Management Expense Ratios (MERs) compared to traditional ETFs.

These funds are generally created to generate inverse returns on a daily basis, which means they may underperform if held for longer periods of time.

Inverse ETFs are available for a large variety of major market indices, common asset classes, and even commodities.

But, they can also lead to larger than expected losses in a short amount of time if the market moves against you, especially leveraged funds.

Here's a summary of the benefits and risks of inverse ETFs: