The market’s up…
The market’s down…
The market’s sideways…
And I could care less because I have a hedge in place.
I mentioned this briefly yesterday because someone during my Pre-Market Prep asked if I hedge my long-term investments.
And like I said yesterday, I do indeed have a strategy. It’s called day trading. Ever heard of it??
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And in case you’re unfamiliar with hedging, put simply, it’s a way for investors to offset potential losses in their accounts.
Traditionally, people hedge with things like:
- Put options – betting against their own stocks or the market.
- Inverse ETFs – they go up when the market goes down.
- Commodities like gold – they hold value when markets are shaky.
As I always say, I can’t tell you what to trade and what not to trade, but I can advise you based on what I think is best for you…or not best for you.
I’ve said it before …ETFs are a great way to buy into a strategy or market thesis with one trade.
But when it comes to inverse ETFs, especially leveraged ones, a lot of traders don’t fully understand what they’re getting into.
What Is an Inverse ETF?
At its core, an inverse ETF is built to move opposite to the index or stock it’s tied to.
For example:
If the S&P 500 drops 1%, an ETF like Direxion Daily S&P 500 Bear 1X (NYSE: SPDN) would ideally go up 1%.
I say “ideally,” and we’ll get to that later…
Inverse ETFs are especially attractive to traders who want to short the market without needing a margin account or dealing with the unlimited risk that comes with traditional short selling.
Sounds pretty simple, right?
Not so fast.
How They Work
Inverse ETFs don’t just magically move in the opposite direction.
And they don’t just short shares of the long ETF, as many people think.
Inverse ETF managers use things like swaps, options and futures contracts to mimic a short position.
The great thing is that you don’t have to mess with all that complex stuff. They handle it for you. You assume the opposing position just by buying the ETF with one click.
But There’s A Catch
Unlike regular ETFs, inverse ETFs reset daily. They’re adjusted every single trading day to match the move of that day only.
And that creates some issues that can work against you…
Because if you’re holding these things longer than a day, you can start to see decay, which is a loss in value that doesn’t line up with the actual move in the underlying asset.
This is where many inverse ETF holders will see discrepancies between their position and the corresponding long ETF.
The charts could look like mirror images but the return isn’t 1:1.
And that gap can get progressively worse the longer you hold the inverse ETF.
My Final Thoughts…
The bottom line is that Inverse ETFs are not long-term investments. Period.
They’re short-term trading tools.
But they’re not for beginners.
And if you’re holding them longer than a day or two without a clear plan, you’re asking for trouble.
If you’re going to trade inverse ETFs, treat them like what they are: tactical instruments.
Know the risks. Know the mechanics.
And always have the right tools at your fingertips.
To research, chart, and see inverse ETF price action in real time, you need a great trading platform.
My top pick is StocksToTrade. It has everything you need to trade ETFs…and regular stocks too, of course.
And right now, you can get two weeks of both the STT platform and our Breaking News Chat service for $17.
Grab your 14-day StocksToTrade + Breaking News Chat trial today for only $
Have a great day, everyone. See you back here tomorrow.
Tim Bohen
Lead Trainer, StocksToTrade