Posted in Finance, Accounting and Economics Terms, Total Reads: 80
Definition: Inverse ETF
Inverse ETF are securities which behave inversely as compared to its pre decided index or sector of stocks. It is the inverse of Exchange Traded Funds (ETF) which moves in the same direction as its decided index.
Here the reference sector can be any such as metals, oil, banks, cements etc. against which the issuer issues the ETFs.
In U.S. it is regulated by Securities and Exchange Commission (SEC), so the issuer has to get the permission from the regulator and issue the ETFs.
Here the investor trades not only in one stock but on that entire sector and invests as per its movement.
For example if index /sector increases positively by 1 Rs then the inverse ETF would reduce by 1 Rs.
So if an investor holds Inverse ETF, he can gain profits when that index/sector is not performing well. But this trade has to be made in short positions because the market is volatile i.e. it can be bearish one day and bullish the other so this can sometimes lead to loss of the investor’s money if he holds it for long time. So it can be used for short positions and not long positions.
As transactions are required to be done on frequent basis it will increase the transaction costs, so it can be used by investors who trade in huge volume and not by retail investors.
Etfs can be a perfect instrument for speculators who daily speculate about the movement of market and make money out of it.
It cannot be used for the hedging purposes as it rebalances with the index on daily basis which may not protect the investor’s money.