What is an Inverse ETF?

An inverse Exchange Traded Fund (ETF) is also much like a mutual fund consisting of a group of stocks. However, an inverse ETF consists of a group of stocks that takes opportunity to make a profit when the price of stock market falls. It follows the inverse of the stock market. If you believe the market overall will fall, you can actually add these inverse ETFs into your portfolio. This strategy is very similar to shorting stocks but without using a margin account. We all know that when you want to short a stock, your brokerage account must be converted to a margin account. Otherwise, you cannot short any stocks.

I advise investors not to get into inverse ETFs as a long-term investment because the market cannot go down for a very long time and it goes against the history of the stock market. There will be ups and downs but overall, the market tends to go upward direction. Inverse ETFs are attractive when there is a downturn in the stock market to minimize the losses.

Here are three inverse ETFs:

1. SRS - ProShares UltraShort Real Estate

The Fund seeks daily investment results, before fees and expenses, that correspond to twice (200%) the inverse (opposite) of the daily performance of the Dow Jones U.S. Real Estate Index.

2. FAZ - Direxion Daily Financial Bear 3X Shrs

The Fund seeks daily investment results of 300% of the inverse (or opposite) of the price performance of the Financial Index. The Fund seeks to create short positions by investing at least 80% of its net assets in Financial Instruments that provide leveraged and unleveraged exposure to the Financial Index.

3. ERY - Direxion Daily Energy Bear 3X Shrs

The Fund seeks daily investment results of 300% of the inverse (or opposite) of the price performance of the Energy Index. The Fund seeks to creates short positions by investing at least 80% of its net assets in Financial Instruments that provide leveraged and unleveraged exposure to the Energy Index.