3 Best Inverse ETFs of 2022

3 Best Inverse ETFs of 2022

In this article, I'm gonna walk you guys through a little-known investment vehicle known as inverse ETFs. Now, inverse ETFs are basically a way to win in a recession. If you guys are like me, you're probably trying to avoid checking your investments every day, because you just don't want to see that negativity in your life. 

It's not fun opening up your trading app and seeing negative 5% and negative 10%. Whatever it may be, it's definitely been a bloody start to the year. And honestly, pretty much everybody's in the same boat. People are losing left and right because all major indexes are down the s&p 500, the year to date is down almost 20% and the NASDAQ is down almost 30%. 

So really, no matter where you go, you're probably losing money. So with losses piling up and all of these major indices, where can you put your money, a recession is potentially right around the corner, maybe we'll get some news for the second quarter of this year, and potentially could be in a recession, if not probably headed towards one later this year, or maybe even early next. 

So if that's the case, you're probably a little bit worried about all that money that you have saved away in s&p 500 index funds, however, had you invested in Inverse ETFs. To start this year, you could be up 30% Instead of being down, like probably most of your friends who are invested in just traditional equities.

So, now the question is What is this Inverse ETF? Is this some strange investment opportunity? Yes and no. So an Inverse ETF is an exchange-traded product that tries to do the exact opposite of what a traditional ETF or index fund does. And an index fund seeks to track the performance of any given index.

So like the s&p 500, the NASDAQ, or the Russell 2000. An index fund seeks to match exactly the performance of that index, and not try to beat it or not try to underperform relative to that. And an Inverse ETF seeks to do the exact opposite. So as a good example, just to quickly explain what an ETF is, if you're not familiar, the most popular s&p 500 ETF is called SPY. 

And again, this fund seeks to track the performance of the s&p 500. And probably the best way to understand what SPY does. And what an index fund does is imagine it's like a GIANT pie with 500 different slices. So it's the 500 biggest companies in the country by market cap. And all of these pie slices, the 500 of them are going to have different sizes. 

And each of those sizes varies on a daily basis, depending on how valuable each of those companies is. So some of the biggest companies you've probably heard of, obviously, like Apple and Amazon have a much bigger slice of the pie than some of the smaller ones that are maybe ranked 500 or 499th. And on a daily basis, those values are changing. And so SPY is also trying to match that.

And so the percentage of one share is going to hold a little bit of apple, a little bit of Netflix, a little bit of Google, and then a very small amount of whatever the 500th Rank company is at that time. And so this is actually where the Inverse ETFs come in. So they look at that pie with 500 slices that the SPY is tracking and then does the exact opposite. 

So essentially, it's taking a short position, or it's betting that all of those stocks are going to lose value. So to understand how this works, if you have $100 of SPY in your portfolio, and then $100 of an inverse fund to that you have 200 total dollars in your portfolio, no matter where the market moves up or down or sideways, left, right, you're always gonna have that $200 In an ideal world.

But at any given time, if you started with equal amounts of money on both sides of the position, then essentially, you're just never going to have any gains, you're going to be perfectly hedged against gains or losses.

So of course, this isn't exactly a wise investment decision because you're gonna put your money in and it's not going to go anywhere, it's not gonna go up or down, it's just going to stay flat. 

So this is why really prudent investors will use inverse ETFs when they're expecting downfalls in the market. So what's the best strategy to use? Inverse ETFs? When should you use them and why? So basically how it works. If you invest in an Inverse ETF, you're going to win when other people are losing. 

When the market is crashing, your portfolio is going to be going like this. And the key to doing well with Inverse ETFs is timing the market and I actually say this with a little bit of hesitation.

Because timing the market is of course extremely difficult to do. If it was easy to do, then people would be making themselves millionaires overnight because they'd be making fantastic investment decisions. 

And obviously, we know that even investment professionals have an extremely hard time doing this. So remember, if you're betting that the market is going to crash, it's exactly what it is. It's a bit. But I think in the macroeconomic environment that we're in today, where a lot of people are predicting a market crash, and a recession over the next couple of months or maybe a year, it might actually be a good time to think about investing in an Inverse ETF. 

Now some other pros to Inverse ETFs are that it's effectively a safe way to short stocks. Traditionally, when you short stocks, you have a lot of downside risk. So if your bet essentially isn't a great bet, you can lose substantially more money than you've actually invested in the first place.

So it can be actually really dangerous and really risky for investors, especially ones that don't really know what they're doing. Now, an inverse ETF is protected against those downside risks, because you can only lose the money that you've invested in the Fund. If you invest $1,000, in an Inverse ETF, if that Inverse ETF goes to zero, your money, you know, is now worth nothing, you get nothing.

But there's never going to be a negative balance where you'd have to repay or, you know, take out a loan to cover the losses, the only risk and exposure you have is the money you've invested in the Fund. And I think another great Pro is in a recession, it's really hard to pick out who are going to be the losers and who are going to be the handful of winners. 

And an ETF is a great way to instead of having to pick one or two or three winners, you're picking, you know, who is the on average, who's going to be losing who are the 500 losers here. And I think that's a much easier bet to make, especially when you're pretty confident where the economy is going to go.

And probably the biggest warning disclaimer, listen up to this one, generally, the stock market goes up over time, right? So if you're investing in inverse ETFs, you're taking the opposite position of that, you're betting that the stock market is going to go down. And as we know, over a great amount of time over the last 100 years, the stock market generally goes up by about eight or 9% per year.

Of course, there are ups and downs were some years, it may be up 20% in other years, it might be down 20%. And so that's what you're trying to find is those years where it's going to be down 20%. So inverse ETF investing is definitely not something you should do for a long time, because again, over the long term, the stock market's going to go up.

And you don't want to be holding the opposite position to that, because you're probably gonna lose a lot of money. And I think another con here, or another little warning is that you know, this is a little bit more of an advanced investing strategy. So if you don't really have a solid portfolio and a solid understanding of ETF investing, and just investing in general, this is probably something I would stay away from. 

It's not needed. You know, really, for the vast majority of investors, I think the vast majority of investors would be much safer just investing in traditional ETFs. And buy and hold and just sit there, write out the ups and downs and enjoy your life in retirement once you become a millionaire. 

And another big con here is that inverse ETFs tend to have really high expense ratios. Traditional ETFs generally have extremely low costs, because they're low maintenance, the investing is generally done by a program or computer. So there's not a lot of human interaction. And so the funds can be offered at an extremely low cost.

Inverse ETFs are a lot different, there's a lot more involved because they're taking short positions. They're doing a lot of stuff behind the scenes to create this inverse position. And so fees tend to be around 1%, which is pretty high. So definitely something to be aware of. All right now we know exactly what an inverse ETF is, we know what some investment strategies are for using them. 

Now, we know what the pros and cons are. Now let me walk you through three Inverse ETFs that I think you should explore if you're interested in investing in one. 

#1. NUMBER  

The first inverse ETF is ProShares Short S&P500 ETF ($SH). It is doing the exact opposite of what the s&p 500 is doing. So it's issued by pro shares. The expense ratio again is fairly high at 0.9%. And assets under management are about $2.7 billion. And looking at the performance here probably what everybody's most interested in over the last year they've returned about 21%. And again, pretty much matches what we know about the s&p 500 that it's down about 20%.

#2. NUMBER  

The second inverse ETF that I want to share with you guys is ProShares Short QQQ ETF ($PSQ). And this Inverse ETF actually tracks the NASDAQ or is the inverse to the NASDAQ. So the expense ratio here is a little bit higher than the previous one $SH this expense ratio is 0.95% In about half the size of the previous fund at $1.3 billion and performance-wise over the last year 31% again pretty much exactly matching what we know of how the NASDAQ has performed, although the inverse right so NASDAQ is down about 30%

#3. NUMBER 

The third on the list is the ProShares Short Russell2000 ($RWM). And just like this one sounds similar to the other two I've shared. This is the inverse ETF of the Russell 2000 Expense Ratio very similar to 0.95%. And again, continuing to get a little bit smaller. This one only has about $500 million of assets under management and performance over the past year, about 25%.

I hope that you were able to learn a lot about inverse ETFs and why they might be useful in your portfolio or why they might not be.