10 Inverse ETFs That Gain in a Bear Market | investment

Let’s do the disclaimers first: Inverse exchange-traded funds, or ETFs, particularly leveraged funds that aim to deliver twice or even three times the returns of an underlying index, are inherently risky long-term bets. History shows that stocks of all varieties tend to generally rise over the long term, and research shows market-timing techniques often cause investors more harm than good. That said, if you’re tired of seeing your portfolio bleed red ink this year, it may be worth exploring the universe of inverse ETFs that are out there. As the name implies, these funds go up when the market goes down. The opposite is true too they tend to crash when the market is surging so you need to know when to get out. However, the following 10 funds all have shown the potential to deliver big short-term gains in 2022 for investors willing to take on a bit more risk via this strategy.

The largest inverse ETF by assets under management at present is SQQQ, with roughly $4 billion in assets. It is linked to the Nasdaq-100 index of the largest stocks on this tech-heavy exchange but keep in mind it is also a leveraged fund, meaning that instead of just moving the opposite direction of its benchmark, it moves even faster. Specifically, SQQQ is a 3X fund that is built to move three times in the opposite direction of the Nasdaq-100. This doesn’t always line up with long-term performance, as its calculated on a daily basis, but year to date SQQQ is up about 80% as of this decline compared with a roughly 27% for the index it tracks.

Another very popular inverse fund, this product is designed to deliver the opposite performance of the S&P 500. It is not leveraged and the strategy is simply for a 1-to-1 inverse on a daily basis. As a result, SH has risen about 20% so far this year as the benchmark S&P 500 index of large-cap stocks has moved about 20% in the opposite direction. Unlike the leveraged SQQQ, which is most commonly a vehicle for speculators, SH has nearly $3 billion in assets in part because some investors use this product as a hedge, or “insurance,” against declines given its liquidity and ties to the preeminent US equity index.

Splitting the difference is yet another ProShares fund, which is a 2X leveraged inverse fund tied to the S&P 500. This too is a liquid and popular alternative for investors, with more than $1 billion in assets at present. As with nearly all other funds out there, it is designed to deliver this double inverse strategy only on a daily basis. However, its year-to-date returns of about 39% show that the fund has compounded pretty close to 2X the performance of SH so far in 2022.

The 3X version that’s the natural next step after SH and SDS, SPXU seeks to supercharge the prior strategies. The return of about 53% year to date in 2022 isn’t quite three times the inverse of the S&P 500 benchmark’s performance, but it’s pretty darn close. As with the other ProShares offerings, this fund is well capitalized at present with just over $1 billion in total assets. But those looking at different fund families may also want to consider the Direxion Daily S&P 500 Bear 3X Shares (SPXS) that is a very similar 3X inverse fund tied to the S&P 500.

When looking at inverse investments, you don’t have to limit yourself to stocks or major equity indexes. TMV offers investors a way to profit from the downside potential in fixed-income markets, with a strategy that aims to deliver 300% of the opposite performance of 20-year US Treasury bonds. To be clear, this is all about the principal, or “par,” value of bonds and is only tied to yield insofar as rate changes affect this value. Bond values ​​tend to rise as interest rates fall, since older bonds with higher payouts are more attractive, and then tend to drop when rates rise as newer Treasurys yield more than older issues. As the Federal Reserve embarks on a period of tighter monetary policy in 2022, many investors are carving out a stake in TMV in anticipation of higher rates and lower bond values ​​to come.

Continuing the laundry list of inverse ETFs from ProShares, this fund is tied to the Russell 2000 index of small-cap stocks. This is an index that calculates the top 3,000 companies in the US stock market based on their market value and then cuts out the 1,000 largest firms. For investors who are looking to play the downside of a rough economic environment, smaller companies are sometimes a better bet because they are frequently undercapitalized and less mature than megacap blue-chip stocks. RWM is a roughly $500 million exchange-traded product based on current assets. It does not use leverage, so it is up 22% while the Russell 2000 is down about 22% year to date in 2022.

One of the most profitable trades in 2022 has been to rely on the surging energy market, via either Big Oil stocks or energy commodities like crude oil or natural gas. However, SCO has been gathering assets lately out of a fear that oil prices may have topped in 2022 and could be set for a rollback if demand wanes amid an economic slowdown. SCO is a 2X leveraged fund, meaning it moves twice as fast in the opposite direction of crude oil. And while the fund is deeply underwater year to date in 2022, thanks to the rising price of crude, this inverse ETF is actually up more than 35% in the last month or so as oil has dropped from recent highs, recently falling under $100 a barrel for the first time since May.

Perhaps the most quirky of all the inverse funds on this list, SVXY uses a sophisticated strategy that is designed to help investors profit from decreasing volatility. It is tied to the CBOE Volatility Index, or VIX, that is a measure of anticipated stock market volatility thanks to its underlying link to S&P 500 index options. SVXY is an inverse play on these futures. Just be aware that it is incredibly difficult to predict how this inverse fund will move even if you are directionally accurate about general trends in the market. After all, this is a derivative of a derivative of a derivative, as you are effectively short-selling futures that are tied to an index of options based on the S&P 500 index of stocks. A lot gets lost in translation this way, making SVXY a very aggressive investment. But with about $400 million in assets, it still clearly has a following.

This 3X inverse fund is tied to the Dow Jones Industrial index of 30 major US corporations. Most investors no longer see the Dow as representative of the broader domestic stock market, given its rather focused list of just 30 components and the absence of some big-name companies, including Amazon.com Inc. (AMZN), Exxon Mobil Corp. (XOM) and other household names. However, if you are one of those that prefer to see the Dow as “the stock market,” then this $300 million inverse fund allows you to make a leveraged bet against that key index.

The most targeted of all the inverse funds on this list is the sector-specific SOXS. This is a 3X leveraged fund that aims to provide three times the opposite movement of a key basket of semiconductor manufacturers and chip-related tech stocks. This inverse ETF has more than doubled so far in 2022 thanks to supply chain disruptions and other challenges that are weighing heavily on chipmakers right now. This clearly isn’t a long-term investment given its very targeted and risky nature. However, swing traders who carved out a position in SOXS this year have found a way to drive fast and significant profits in an otherwise challenging market.

• ProShares UltraPro Short QQQ (SQQQ)
• ProShares Short S&P 500 (SH)
• ProShares Ultra Short S&P500 (SDS)
• ProShares UltraPro Short S&P 500 (SPXU)
• Direxion Daily 20+ Year Treasury Bear 3x Shares (TMV)
• ProShares Short Russell 2000 (RWM)
• ProShares UltraShort Bloomberg Crude Oil (SCO)
• ProShares Short VIX Short Term Futures ETF (SVXY)
• ProShares UltraPro Short Dow 30 (SDOW)
• Direxion Daily Semiconductor Bear 3x Shares (SOXS)