Inverse ETFs allow investors to bet against, or “short” the market. Here we’ll look at the best inverse ETFs to profit from stock market downturns.
Disclosure: Some of the links on this page are referral links. At no additional cost to you, if you choose to make a purchase or sign up for a service after clicking through those links, I may receive a small commission. This allows me to continue producing high-quality, ad-free content on this site and pays for the occasional cup of coffee. I have first-hand experience with every product or service I recommend, and I recommend them because I genuinely believe they are useful, not because of the commission I get if you decide to purchase through my links. Read more here.
Prefer video? Watch it here:
Introduction – Why Inverse ETFs?
Inverse ETFs can be a market timer’s best friend. They allow bears to short, or bet against, the market. That is, when stocks drop, the value of these ETFs goes up.
Typically bonds are held for downside protection due to their uncorrelation to stocks. A more direct hedge to maximize gains while the market drops is to use inverse ETFs to short the market. Inverse ETFs use derivatives to produce positive returns from market declines.
Inverse ETFs are best used over the short term since the underlying derivatives contracts are settled daily by the fund manager. Inverse ETFs allow investors to short the market without using a margin account. Bears who use inverse ETFs usually target the S&P 500, as inverse ETFs for the index have the greatest liquidity, and the S&P 500 is considered a proxy for the broader stock market. Below we’ll look at the 3 best inverse ETFs to bet against the S&P 500 Index.
The 3 Best Inverse ETFs
Below are the 3 best inverse ETFs to short the S&P 500. They all come from ProShares, one of the leading providers of inverse and leveraged ETFs.
SH – ProShares Short S&P 500
The ProShares Short S&P 500 (SH) is the most popular inverse ETF, with nearly $3 billion in assets. The fund provides a -1x daily return of the S&P 500 Index. If the S&P 500 Index drops by $1, this ETF will rise by roughly $1. This ETF has an expense ratio of 0.89%.
SDS – ProShares UltraShort S&P500
Those desiring a little more volatility may want to use leveraged funds. The ProShares UltraShort S&P500 (SDS) is a leveraged inverse ETF providing -2x daily returns of the S&P 500. If the S&P 500 drops by $1, this ETF will rise by roughly $2. This fund has over $1.1 billion in assets and an expense ratio of 0.90%.
SPXU – ProShares UltraPro Short S&P500
There’s also a -3x ETF. The ProShares UltraPro Short S&P500 (SPXU) delivers -3x daily returns of the S&P 500. If the index drops by $1, the value of this ETF will rise by roughly $3. This ETF has nearly $1 billion in assets and an expense ratio of 0.91%. Bears making a short-term bet on an impending crash may want to use this -3x ETF to get the most bang for your buck, since its expense ratio is only slightly higher than that of the -1x ETF above.
Where To Buy These Inverse ETFs
All the above inverse ETFs should be available at any major broker. My choice is M1 Finance. The online broker has zero trade commissions and zero account fees, and offers fractional shares, dynamic rebalancing, intuitive pie visualization, and a sleek, user-friendly interface and mobile app. I wrote a comprehensive review of M1 Finance here.
Disclaimer: While I love diving into investing-related data and playing around with backtests, I am in no way a certified expert. I have no formal financial education. I am not a financial advisor, portfolio manager, or accountant. This is not financial advice, investing advice, or tax advice. The information on this website is for informational and recreational purposes only. Investment products discussed (ETFs, mutual funds, etc.) are for illustrative purposes only. It is not a recommendation to buy, sell, or otherwise transact in any of the products mentioned. Do your own due diligence. Past performance does not guarantee future returns. Read my lengthier disclaimer here.
Don't want to do all this investing stuff yourself or feel overwhelmed? Check out my flat-fee-only fiduciary friends over at Advisor.com.