The benefits of an inverse E.T.F. can be valuable — but only for a day at a time, said Greg McBride, chief financial analyst for Bankrate.com.
“This is trading, not investing,” he said. “Inverse E.T.F.s are designed to track daily movements, not long-term movements.”
Mr. McBride added: “If you have an inverse S&P 500 E.T.F., it’s designed to rise 1 percent today if the S&P 500 falls 1 percent today. But if the S&P is down 5 percent over the next 12 months, don’t expect the inverse to be up 5 percent.”
Consider that while the S&P 500 was down about 5 percent for the year as of mid-December, the ProShares UltraPro Short S&P 500 had a year-to-date loss of 18 percent. By the close of trading for the year, however, the UltraPro ETF was up 2.3 percent for the year, compared with the S&P 500’s loss of 6.2 percent. Although the fund did finish up, it was well off its three-to-one short ratio for the year.
That’s because inverse funds are rebalanced at the end of each trading day to restore the targeted risk exposure. Over more than a day or two, that daily reset can compound the fund’s exposure to a dangerous degree. Yet the fund’s benchmark simply continues to make daily gains or losses with no rebalancing, said John Swolfs, chief executive of Inside E.T.F.s, a four-day, 200-speaker annual conference on E.T.F.s organized by Informa Exhibitions USA.
“If you can pick and choose your days right, you can do well,” he said, “but if you think you’ll buy this on Monday and sell it on Friday, your returns won’t be good.”
Pro Shares offers 62 inverse E.T.F.s, said Michael Sapir, the company’s chief executive.
“They’ve been tested through the tech boom and the financial crisis, and they all acted to do what they advertise,” he said.