An Introduction – Inverse ETF
Do you silently detest the finance editors for making grim market predictions every day when you open the newspaper? Or are you questioning your financial approach because you keep hearing about the impending apocalypse? In either case, investing in the correct fund-inverse exchange-traded funds-can help you profit from these doomsday-like news stories.
While the rest of the world is betting on the markets to rise, you may hedge your chances by purchasing an inverse ETF.
What is an inverse ETF?
To better comprehend the term “inverse ETF,” let’s split it down. An exchange-traded fund (ETF) is a type of mutual fund that is traded on a stock market. It is a collection of securities, such as stocks, that follow the performance of a benchmark index. A NIFTY 50 ETF, for example, tracks the NIFTY 50 index. If an investor has NIFTY 50 ETF units, he or she will be hoping for the index to rise.The value of the underlying assets that the ETF tracks will rise as a result, and the investor will profit if they decide to sell.
This type of ETF benefits when the status of the index it tracks falls, as the name implies. It is made up of derivatives including futures contracts, options, and swaps, among others. A ‘short ETF’ or ‘bear ETF’ is another name for an inverse ETF. When a market undergoes price drops, it is referred to as a “bear” market.
How does an inverse ETF work?
Inverse ETFs rely on derivatives to generate returns for its investors. Inverse ETFs typically invest in daily futures. A futures contract, often known as a futures contract, is an agreement between two parties to acquire or sell a security or asset at a fixed price at a future date. The investor or fund manager buys a futures contract and bets on the market falling. When the index falls by 2%, the inverse ETF climbs by 2%. An inverse ETF is a short-term investment because it is based on derivatives such as futures contracts, which are exchanged daily.
What are leveraged inverse ETFs?
Do you have a strong feeling that the benchmark index will continue to decline? If your confidence, knowledge, and risk tolerance are all in agreement, you can leverage your inverse ETF to boost its performance. Aside from derivatives, debt can be used to boost the index’s results.
Returns can be boosted by a factor of 2:1 or even 3:1 with a leveraged inverse ETF. This reflects that if the NIFTY 50 from the previous example falls 3%, your 3x leveraged inverse ETF will rise 9%.
Advantages Of Inverse ETF
It acts as a counterbalance to traditional ETFs in your investment portfolio. If you have traditional ETFs monitoring a benchmark index, for example, having an inverse ETF attached to the same index implies that if the index loses points, your inverse ETF makes up for it and more.
In your investment portfolio, it functions as a contrast to standard ETFs. If you have standard ETFs tracking a benchmark index, having an inverse ETF tracking the same index means that if the index loses points, your inverse ETF compensates for it and more.
Disadvantages Of Inverse ETF
The first drawback stems from the high expenditure ratios. Because inverse ETFs are actively managed funds, this is the case. However, you will be better rewarded if you own inverse ETFs for a short period of time.
Second, in the long run, inverse ETFs are likely to underperform. Shorting stocks or index funds is a superior option.
In A Nutshell
You now have a general knowledge of what an inverse ETF is and how it works. Reach out to Angel One, one of India’s premier brokerage houses, for a complete review of your investment needs to see if it has a place in your portfolio