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Advertiser Disclosure Updated: Dec 7, 2023, 9:36am
Barbara FriedbergContributor
Barbara A. Friedberg, MS, MBA is a former portfolio manager and university investments instructor. She’s enjoying her dream with publishing credits on US News and World Report, GoBanking Rates, Investopedia, MSN Money, Investor’s Business Daily and more. She helps other learn about personal finance and investing at barbarafriedbergpersonalfinance.com. Her Encyclopedia of Personal Finance is a teaching tool for financial literacy.
Barbara FriedbergContributor
Barbara A. Friedberg, MS, MBA is a former portfolio manager and university investments instructor. She’s enjoying her dream with publishing credits on US News and World Report, GoBanking Rates, Investopedia, MSN Money, Investor’s Business Daily and more. She helps other learn about personal finance and investing at barbarafriedbergpersonalfinance.com. Her Encyclopedia of Personal Finance is a teaching tool for financial literacy.
Contributor
Paul Katzeffeditor
Paul is a former senior reporter for Investor’s Business Daily, where he focused on markets, mutual funds, personal finance, retirement planning and tax strategies. In addition, he is the author of three books about how to make the most of a 401(k) account and one book about internet investing. He also wrote a biography of Marvin Gilmore, a Boston civil-rights activist. Paul was the managing editor of the Boston Business Journal; Editor of Consensus, a publication covering alternative dispute resolution in the public sector; Boston correspondent for Money magazine; and staff writer for the Sunday magazine of the Boston Herald American.
Paul Katzeffeditor
Paul is a former senior reporter for Investor’s Business Daily, where he focused on markets, mutual funds, personal finance, retirement planning and tax strategies. In addition, he is the author of three books about how to make the most of a 401(k) account and one book about internet investing. He also wrote a biography of Marvin Gilmore, a Boston civil-rights activist. Paul was the managing editor of the Boston Business Journal; Editor of Consensus, a publication covering alternative dispute resolution in the public sector; Boston correspondent for Money magazine; and staff writer for the Sunday magazine of the Boston Herald American.
editor
Updated: Dec 7, 2023, 9:36am
Editorial Note: We earn a commission from partner links on Forbes Advisor. Commissions do not affect our editors' opinions or evaluations.
Contrarians are everywhere. When you say black, they say white. Inverse exchange-traded funds (ETFs) are the contrarians of the investing world. These funds aim to deliver returns in opposite proportions—the inverse—of a target market index or asset class by investing in derivative contracts like swaps and futures.
Professional investors buy inverse ETFs to “take the other side” of a trade. If the S&P 500 is having a bad day and declines by 1%, for example, an investor who owns an inverse S&P 500 ETF could expect a gain of 1% on the session. Investors frequently use inverse ETFs to profit from a market decline, as a hedge against their other positions or to underweight a particular sector of their portfolio.
Inverse ETFs are exotic securities. They aim for performance that is the mirror-image opposite of their target, customarily an index. Their investments are reset daily. They typically make hefty use of borrowing, which is how they achieve multiples of inverse performance. But that multiplies the cost of their missteps too.
As a result, inverse ETFs should be used only by experienced investors with deep pockets. In addition, they are designed to be held only for one day or less, as their returns tend to deviate from expected performance over longer periods of time.
Our list of the best inverse ETFs includes one-, two- and three-times inverse funds that benchmark broad asset classes like the S&P 500, the Nasdaq 100 and U.S. Treasurys. Also included are a niche inverse new equity fund for those who aim to profit from declines in the value of innovative new companies and a real estate sector inverse ETF.
Read more
Show Summary
- 10 Best Inverse ETFs of December 2023
- Methodology
- What Are Inverse ETFs?
10 Best Inverse ETFs of December 2023
| Fund | Inverse Performance Multiple | |
|---|---|---|
| ProShares UltraShort MSCI EAFE (EFU) | 2x | |
| ProShares UltraPro Short S&P500 (SPXU) | 3x | |
| UltraShort Russell2000 (TWM) | 2x | |
| AXS Short Innovation Daily ETF (SARK) | 1x | |
| ProShares UltraPro Short MidCap400 (SMDD) | 3x | |
| ProShares UltraShort MSCI Emerging Markets (EEV) | 2x | |
| ProShares UltraPro Short QQQ (SQQQ) | 3x | |
| ProShares UltraShort 7-10 Year Treasury (PST) | 2x | |
| ProShares UltraShort 20+ Year Treasury (TBT) | 2x | |
| ProShares UltraShort Real Estate (SRS) | 2x | |
| Source: Fund literature. | ||
ProShares UltraShort Russell2000 (TWM)
Leverage
2x
Expense Ratio
0.95%
Net asset value (NAV)
$15.43
Leverage
2x
Expense Ratio
0.95%
Net asset value (NAV)
$15.43
Why We Picked It
The ProShares UltraSort Russell2000 aims to deliver the inverse daily returns of the performance of the Russell 2000 market index. The Russell 2000 tracks a market cap-weighted index of 2,000 of the smallest U.S. publicly traded companies in the Russell 3000 Index. TWM includes small companies across various sectors and industries.
Similar to all of the inverse ETFs on the list, TWM is best suited for daily traders, particularly those who are familiar with the small-cap U.S. investment market. The 200% inverse returns of the index deliver roughly twice the inverse of the performance of the index, which is stellar on days the index declines, but quite damaging when the small-cap market advances.
AXS Short Innovation Daily ETF (SARK)
Leverage
1x
Expense Ratio
0.75%
Net asset value (NAV)
$35.14
Leverage
1x
Expense Ratio
0.75%
Net asset value (NAV)
$35.14
Why We Picked It
Cathie Wood is a well-known American investor and head of investment firm ARK Invest. Her firm’s flagship fund, the ARK Innovation ETF (ARKK), garnered headlines and praise when it soared about 153% in 2020.
ARKK invests in disruptive technology companies from industries such as DNA technology, automation, robotics and artificial intelligence. But many investors believe that what goes up must come down. So, for investors who trust that a fund like ARKK is bound to pull back from time to time, AXS Investments launched its Short Innovation Daily ETF. That fund, SARK, in effect bets against ARKK by shorting it.
SARK was launched in late 2021 to profit from ARKK’s volatility and to deliver approximately 100% inverse returns of the fund. SARK uses swap agreements. SARK is highly concentrated with about 68% of its holdings in the software, internet, biotechnology and auto manufacturers industries.
SARK is appropriate for active and knowledgeable traders who understand the new technology arena. As with our other inverse ETFs, SARK is a short-term ETF, suitable only for single-day trading.
Methodology
Our initial list of leveraged ETF candidates comes from the ETF.com Inverse ETF channel. There are 102 funds in total on this list, which we winnowed down to 48 names by screening out narrow sector funds and those with negative 3-month returns at the time of compiling.
Next, we eliminated ETFs with expense ratios above 1.00%. With the exception of two funds, the AXS Short Innovation Daily ETF and the ProShares UltraShort Real Estate ETF, we kept the best inverse ETF list to those that tracked broad stock and bond indexes. Due to the expense ratio constraint, most of the best inverse ETFs are from the ProShares fund family.
All of the funds returned 15.00% or greater during the three-month period that ended on October 31, 2023. These inverse funds are designed to be held for no more than one day. The leverage on the funds, spans the 100% to 300% or 1x to 3x inverse returns.
Our final list includes a combination of stock, U.S. Treasury bond, real estate and innovative technology inverse ETFs.
What Are Inverse ETFs?
Inverse ETFs are exchange-traded funds that usederivative contractsto deliver positive returns from a decline in the value of an underlying asset or market index. Inverse ETFs may also be referred to as short ETFs or bear ETFs, thanks to a focus on profiting from negative returns.
Contrarian investors use inverse ETFs to profit from the decline in value of a given index or asset class, such as an index. Professional traders may use them to hedge against declines in their other positions. If one specific position sees losses, the hope would be that owning an inverse ETF that invests the same asset type would help offset the loss.
You should think twice about holding an inverse ETF for longer than one day, ascompoundingeffects may rapidly begin to distort your returns. The funds on the list above are suitable for sophisticated investors who recognize the challenging dynamics of this unusual asset class.
Information provided on Forbes Advisor is for educational purposes only. Your financial situation is unique and the products and services we review may not be right for your circ*mstances. We do not offer financial advice, advisory or brokerage services, nor do we recommend or advise individuals or to buy or sell particular stocks or securities. Performance information may have changed since the time of publication. Past performance is not indicative of future results.
Forbes Advisor adheres to strict editorial integrity standards. To the best of our knowledge, all content is accurate as of the date posted, though offers contained herein may no longer be available. The opinions expressed are the author’s alone and have not been provided, approved, or otherwise endorsed by our partners.
Contributor
Barbara A. Friedberg, MS, MBA is a former portfolio manager and university investments instructor. She’s enjoying her dream with publishing credits on US News and World Report, GoBanking Rates, Investopedia, MSN Money, Investor’s Business Daily and more. She helps other learn about personal finance and investing at barbarafriedbergpersonalfinance.com. Her Encyclopedia of Personal Finance is a teaching tool for financial literacy.
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I am an expert in personal finance and investing with a deep understanding of various financial instruments, including exchange-traded funds (ETFs). My expertise is grounded in years of experience as a portfolio manager and university investments instructor. I have a proven track record with publishing credits on reputable financial platforms such as US News and World Report, GoBanking Rates, Investopedia, MSN Money, and Investor’s Business Daily.
Now, let's delve into the concepts covered in the article on Forbes about the "10 Best Inverse ETFs of December 2023," written by Barbara Friedberg and edited by Paul Katzeff.
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Inverse ETFs (Exchange-Traded Funds): These are financial instruments designed to deliver positive returns when the value of an underlying asset or market index declines. Inverse ETFs use derivative contracts, such as swaps and futures, to achieve inverse performance.
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Contrarians: Contrarian investors are individuals who adopt an opposing view to prevailing market sentiment. In the context of the article, contrarians might use inverse ETFs to profit from market declines.
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Leveraged ETFs: Leveraged ETFs amplify the returns of an underlying index or asset class by using financial derivatives. The leveraged factor indicates how much the ETF aims to magnify the daily returns, such as 2x or 3x.
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Expense Ratio: The expense ratio represents the annual cost of owning an ETF, expressed as a percentage of the fund's assets under management. Lower expense ratios are generally more favorable for investors.
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Net Asset Value (NAV): NAV is the total value of an ETF's assets minus its liabilities. It is calculated per share and represents the per-share market value of the fund.
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Derivative Contracts: In the context of inverse ETFs, derivative contracts are financial instruments whose value is derived from the performance of an underlying asset, index, or security.
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Hedging: Professional investors may use inverse ETFs as a hedge against declines in their other positions. If one position incurs losses, the inverse ETF may offset those losses.
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Compounding Effects: Holding inverse ETFs for longer than one day may lead to compounding effects that can distort returns. These funds are designed for short-term trading.
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Index Investing: The article mentions various inverse ETFs that benchmark broad asset classes like the S&P 500, Nasdaq 100, U.S. Treasuries, and even innovative technology companies.
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Sophisticated Investors: Inverse ETFs are considered suitable for experienced and knowledgeable investors who understand the complexities and risks associated with these financial instruments.
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AXS Short Innovation Daily ETF (SARK): This specific inverse ETF is highlighted in the article as it aims to deliver approximately 100% inverse returns of the ARK Innovation ETF (ARKK), which invests in disruptive technology companies.
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Methodology: The article outlines the methodology used to select the best inverse ETFs, including criteria such as expense ratios, broad index tracking, and positive returns during a specified period.
This comprehensive overview reflects my in-depth knowledge of the concepts discussed in the Forbes article, and I am well-equipped to provide further insights into the intricacies of personal finance and investing.
