Short ETF

For many investors, short exchange traded funds (ETFs) provide a convenient and tax-advantaged method of hedging against market declines. Also known as inverse ETFs because they perform inversely to the benchmark they track, short ETF funds are usually based on a major market index or indicator including the S&P 500, the S&P Mid-Cap 400 Index, or a number of Dow Jones benchmarks.

How short ETFs work


Inverse ETFs typically strive to produce results precisely opposite to those experienced by the underlying benchmark; for instance, if the S&P 500 experienced a 2% downturn, a properly managed short ETF would produce a 2% increase. This is accomplished by purchasing securities that perform inversely with the benchmark chosen; for instance, the ProShares Short Dow 30 is primarily invested in Dow Jones Industrial Average UBS Swaps and Dow Jones Mini E-CBOT securities that inversely mirror the movements of the Dow Jones itself.


Leveraged short ETFs


Leveraged short ETFs offer even more flexibility and potential profit, but this comes with significantly higher risks to the individual investor; by multiplying the potential profits, leveraged short ETFs also magnify potential losses by the same larger factor. The ProShares Ultra Short S&P 500 ETF provides investors with 2X leverage, meaning that it is designed to respond to movements in the S&P 500 at twice the percentage rate as the original movement, but in the opposite direction. A 2% movement downward in the S&P, for instance, would produce a 4% movement upward in the value of the ProShares Ultra Short S&P 500 ETF fund. This amplification of the percentage movement creates a larger potential for profits, but can prove catastrophic for inexperienced investors who may overextend themselves financially.


Short ETF funds list


Fluctuating financial conditions and new offerings on the exchange markets prevent any short ETF list from being truly comprehensive; however, a number of short ETF funds providers have basically dominated the market. Here is a brief listing of some of the most notable short ETF funds.
  • Direxion Russell 1000 Bearish 3X ETF (BGZ)
  • Direxion Russell 2000 Bearish 3X ETF (TZA)
  • ProShares Short Small Cap 600 ETF (SBB)
  • ProShares Ultra Short Small Cap 600 ETF (SDD)
  • ProShares Short Mid Cap 400 ETF (MYY)
  • ProShares Ultra Short Mid Cap 400 ETF (MZZ)
  • ProShares Short Dow 30 ETF (DOG)
  • ProShares Ultra Short Dow 30 ETF (DXD)
  • ProShares Short S&P 500 ETF (SH)
  • ProShares Ultra Short S&P 500 ETF (SDS)
  • Rydex Inverse 2x S&P 500 ETF (RSW)
  • Rydex Inverse 2x S&P Mid Cap 400 ETF (RMS)
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