Inverse ETF

An inverse ETF is designed to deliver the opposite (inverse) performance of a benchmark index. If the S&P 500 falls 1%, an inverse S&P 500 ETF aims to rise 1%. They're primarily used for hedging or short-term speculation.

How Inverse ETFs Work: Use derivatives (futures, swaps) to achieve inverse exposure:

• S&P 500 drops 2% → Inverse ETF rises ~2%
• S&P 500 rises 2% → Inverse ETF falls ~2%

Types of Inverse ETFs:

Type	Leverage	Example
1x Inverse	-100%	SH (Short S&P 500)
2x Inverse	-200%	SDS (UltraShort S&P)
3x Inverse	-300%	SPXU (UltraPro Short)

Popular Inverse ETFs:

• SH - ProShares Short S&P 500
• PSQ - ProShares Short QQQ
• DOG - ProShares Short Dow 30
• SQQQ - 3x Inverse Nasdaq

Critical Warning - Daily Reset: Inverse ETFs reset DAILY, causing "volatility decay":

Day	S&P 500	1x Inverse ETF
1	-5%	+5%
2	+5.26% (back to start)	-5.26%
Net	0%	-0.53% LOSS

Over time, this decay destroys value in volatile markets!

Long-Term Performance Reality:

• Index flat over 1 year → Inverse ETF loses money
• Even in bear markets, inverse ETFs often underperform simple short
• NOT designed for buy-and-hold

Appropriate Uses:

• Day trading
• Very short-term hedging (days)
• Tactical bearish bets
• Portfolio protection during known events

NOT Appropriate For:

• Long-term bearish positions
• Retirement portfolios
• Holding through volatile periods
• New investors

Better Alternatives for Hedging:

• Put options
• Increasing cash allocation
• Reducing equity exposure
• Proper asset allocation