What Is An Inverse ETF?

I have been receiving several emails asking to know more about these inverse ETFs that I talk about so frequently on this site. So I thought I would do a little mid day bonus to discuss them, and dive into them into a little more detail. Sorry, if this is elementary for some of you guys out there, I just thought it would be a worthwhile reference to many out there.

First, lets start with the basics. What is an ETF? ETF or Exchange Traded Funds, are a portfolio of different stocks, industries, or bonds that are traded much like a regular stock is. ETFs are very similar to index mutual funds, but I prefer playing ETFs more than mutual funds. The biggest reason is that you can trade an ETF at any time during the day, much like a stock. Mutual Funds you buy into, most likely doesn't process until the following day(same with selling it). Also, usually the expense fees are smaller with ETFs, so I prefer to stick with them.

With ETFs you are able to buy into sector or industry by buying only 1 fund. You can buy into the Nasdaq, Dow, or even foreign markets. ETFs started in the 90's (SPDR's) and have grown tremendously in poularity the past few years. It is a great way to ride the bumps with more volatility rather than just trading stocks.

In this market I like to stick with Proshares ETFS. By looking at their ETFS, you can see they have several options to choose from. One of the options you will see is their list for Short Proshares, which are known on Wall Street as Inverse ETFS (analysts don't like using the word "short", it's like Voldermort in Harry Potter). These short proshares perform well as their focused benchmark goes down. For instance the short proshare DOG shorts the Dow 30. So as that sector goes down, DOG goes up.

There are also proshares called Ultra Proshares (which I usually like to trade), which are doubled leveraged ETFs that are more volatile. So an ultra short proshare like DXD, which shorts the Dow at double leverage will most likely be double the inverse of the Dow 30. They now even have triple leveraged shares, which I do not deal with much. Too risky for my blood and the volume isn't their for me yet. Just remember, the leverage is a two edged short. It goes up twice as much and then goes down twice as much.

Here are some Top ETFs I like to track and play on the bumps in this market.

SRS -
My favorite Ultra Short Proshare. This is an ultra short to the real estate index. Having the Real Estate market a big part of my life, I find this as one of my niches. I was trading SRS 6 months ago, when I saw early signs of real estate failure for the next few years. SRS shorts big REITS, retailers, brokerage companies and others which most are all struggling right now. It is no coincidence that this has been a rock star ETF.

SKF - Another fabulous one. SKF is an ultra short for the DOW financial indexes. You can probably guess that it has been performing quite well that last couple months (almost hit $300 today).

FXP - An ultra short to the China FTSE/Xinhua China 25 Index, which consists mostly of Chinese financials, energy, and communications. I believe this one is pretty undervalued, considering what China's growth rate was and what the inverse of that looks like.

EEV - An ultra short for Emerging Markets. Being a "global crisis" now, many other countries, along with US, will be hurting the next couple of years.

Other short proshares to note that I like are SDS and QID. As of now, there are only a few on the long side that I trade.

GDX - A gold miners ultra long fund. This tracks the gold sector and gets strong gains when it's up. With the almost sure thing of another rate cut, look for gold to keep getting stronger.

DIG - An ultra long oil fund. Oil has been hammered the past few months. With a cold winter months ahead, I can't see oil staying at these values for very long, no matter how many people car pool in a Prius.

UYG - Ultra long financials (opposite of SKF). This one will be a great buy in a few months to come when banks begin to get their act together. Keep your eye on it for the long haul for the ride back up.

Here are a few that I like to keep my eye on for the time being being. I thought it would be good to get this post out, for those that have been incquiring of what ETFs are and which ones I look at. It's been another volatile day again today and it looks to be unsure where we'll end at. I believe we will get a pretty strong run, which ever way we decide to go (up or down), towards the end of the day. I will give the weekly wrap up later.

15 comments:

  1. Anonymous Says:

    whats your view on FXP? it's gone down considerably today so i bought a few shares

    where do you get your news on china's economy?

  2. Finance Fanatic Says:

    I have been bullish on FXP since it has been below $90. I bought shares at $92, 82, 74 and 67. I have a lot of business partners in China, so I hear a lot of things about China from the consumer, instead of the altering communist Chinese govt. They're hurting, and I believe they'll be hurting even more in the future.

  3. mark Says:

    FXP closed at $64.50, or down about %30 today in todays insane last minuet rally (how is it that it is more closely tied to the Dow's movements then Shanghais?) . I'd figure that this weekend is going to have some bad news, thus how would be the best way to purchase FXP Monday morning? What options would you recommend to someone who has never touched them before?

  4. Finance Fanatic Says:

    Right now everything is tied to the DOW. Look how world markets respond to our down days. China is the largest holder of US treasuries and the US it their largest consumer base. As we go down, they go down. Temporarily, there has been some minor separation of that due to Government intervention and manipulation. But wait until reality sets in for them. When a majority of your country's business is build around manufacturing, in this market, that's bad. I already own a ton of FXP, I'm just riding it now, waiting for it to go back up above $100. Today would have been a good day to buy it, I bought EEV today at $91.

  5. andy Says:

    How does proshares calculate their commissions? After you sell, do commissions get pulled immediately or do you have to sit around and wait for it to get pulled...

    I'm new to the ETF scene... Mostly do basic buy/sell scenarios... Excellent article btw...

  6. Finance Fanatic Says:

    Andy,
    Different ETF funds differ on their expense ratios. I believe Proshares charges a .95% expense ratio. These are usually settled when closed out of the fund.

  7. Steve Says:

    I see a lot of discussion regarding UYG but far less regarding FAS throughout the internet and on CNBC.

    If one believes that the financials will eventually rise (which is sure to happen barring a revolution) why hold UYG when the returns would be so much greater with FAS?

    Is there something I'm missing?

  8. Finance Fanatic Says:

    Steve,
    The 3x etf's haven't gotten their volume up to a comfortable level for me yet to play them. And they get hit pretty hard on the down days.

    For the riskier players, sure they are great and I will probably begin to play them as i become more comfortable. I think I may buy some FAZ here soon.

  9. OSC Says:

    This is brand new to me, the concept is great. So can you buy into/cash out DOG as a stock symbol(*would love to do this inside my M.Stanley IRA*) or does it need to be through a managed fund with specific entrance into?

  10. Finance Fanatic Says:

    OSC,
    It indeed trades just as easy as a stock and can be traded with any trading platform.

  11. james moylan Says:

    I have a web site where I give advise on penny stocks and stocks under five dollars. I have many years of experience with these type of stocks. If their is anyone that is interested in these type of stocks you can check out my web site by just clicking my name. I would like to comment about inverse exchange traded funds. I am not a big fan of these things. these things generally do not work the way their suppose to their are numerious financial products that claim that they can mirror a certain commodity or index their track record is inconsistent at best.

  12. QUALITY STOCKS UNDER 5 DOLLARS Says:

    Excellent post on inverse ETF'S.

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