What Are Inverse & Short ETFs?
Inverse or Short ETFs are exchange-traded funds that enable you to bet against (short) a market, sector, or index. Typically, Short ETFs simplify the process of shorting the market and incorporating leverage, as you can simply purchase the ETFs that trade on a live exchange.
Inverse ETFs usually come with built-in leverage of 1x, 2x, or 3x leverage. If you buy a 3x Inverse ETF on any market day, and the index moves down 1%, you can expect a 3% profit. Conversely, if the market moved up 3% on that day, the 3x leveraged ETF would ensure you incur a loss of 9%.
The Best Short & Inverse ETFs
While there is no single “Best Short/Inverse ETF,” the best ETFs all share the following traits. Firstly, they should have significant assets under management; secondly, they should have large enough trading volume to ensure liquidity; and lastly, they should have low management fees.
This is why our list of the best Short & Inverse ETFs includes the 10-day average trading volumes, the net assets under management, and the expense ratio.
5 Tips on ETFs That Short The Market?
1. Inverse ETFs Should be Traded on a Daily Basis?
All short or inverse ETFs have warnings that they should only be traded on a daily basis. Of course, you can hold them for longer than one day, but you will see mismatches in the return of the short ETF vs. the actual index over time.
Inverse ETFs Do Not Match the Index Performance Because:
- The underlying contracts supporting the Inverse ETFs need to be rebalanced at the end of the trading day. This causes slippage.
- The effect of the volatility of an index will affect compounding, which affects the inverse ETF. For more information, see this Leveraged ETF FAQ.
- Related Article: Our Resident ETF Trader Joe’s Leveraged ETF Strategy
2. Inverse ETFs Should Have Good Liquidity & Volume
It is important that if you purchase an Inverse ETF, you can sell it when you want to, for a price that is close to your target price. There are 244 Inverse/Leveraged ETFs on the US exchanges, and the average 10-day trading volume is 1.8 million shares per day. You will want to choose ETFs that average at least 500,000 traded per day.
3. Choose ETFs With Higher Assets Under Management
The median amount of Net Assets under management for leveraged and inverse ETFs is $50 million. It is wise to only utilize ETFs with more than $100 million in assets managed; this helps with liquidity and the fund’s stability.
4. ETFs Should Have Low Expenses
Any Inverse or Leveraged ETF you choose to trade should have lower expense ratios. Of the 244 ETFs in this study, the average expense ratio is 0.96%, but the range of expenses spanned from 1.85% to 0.35%. The largest most liquid funds have an expense ratio between 0.95% and 1.07%, which is acceptable.
- Related Article: The 21 Best Ethical ESG ETFs
5. Use a Commission Free Broker to Minimize Costs
When purchasing ETFs, you should select a broker that enables you to buy and sell ETFs with $0 zero commissions. Firstrade has over 2,200 commission-free ETFs, the largest in the industry. Read the Firstrade Review or visit Firstrade.
Inverse / Short S&P 500 ETFs
|Short S&P 500 ETFs||Ticker||Net Assets ($M)||Expense Ratio||Leverage||10-Day Volume (Avg)|
|ProShares Short S&P500||SH||$2,864||0.90%||1X||10,014,473|
|ProShares UltraShort S&P500||SDS||$1,091||0.91%||2X||10,768,469|
|ProShares UltraPro Short S&P500||SPXU||$887||0.93%||3X||21,883,476|
|Direxion Daily S&P 500 Bear 3X Shares||SPXS||$736||1.07%||3X||30,179,092|
|Direxion Daily S&P 500 Bear 1X Shares||SPDN||$167||0.50%||1X||134,750|
|Direxion Daily S&P 500 High Beta Bear 3X Shares||HIBS||$45||1.07%||3X||1,340,846|
Inverse / Short Nasdaq ETFs
|Inverse Nasdaq ETFs||Ticker||Net Assets ($M)||Expense Ratio||Leverage||10-Day Volume (Avg)|
|ProShares UltraPro Short QQQ||SQQQ||$1,520||0.95%||3X||67,453,112|
|ProShares Short QQQ||PSQ||$774||0.95%||1X||4,373,616|
|ProShares UltraShort QQQ||QID||$283||0.95%||2X||10,253,212|
|ProShares UltraShort Nasdaq Biotechnology||BIS||$12||0.95%||2X||41,206|
|ProShares UltraPro Short Nasdaq Biotechnology||ZBIO||$3||0.95%||3X|
- Related Article: The 11 Stock Sectors & The ETFs To Trade Them
Dow Jones Short ETFs
|Dow Jones Short ETFs||Ticker||Net Assets ($M)||Expense Ratio||Leverage||10-Day Volume (Avg)|
|ProShares UltraPro Short Dow30||SDOW||$516||0.95%||3X||6,776,916|
|ProShares Short Dow30||DOG||$408||0.95%||1X||665,817|
|ProShares UltraShort Dow30||DXD||$160||0.95%||2X||1,453,146|
|Direxion Daily Dow Jones Internet Bear 3X Shares||WEBS||$5||1.07%||3X||6,395|
Short Russell & Mid Cap ETFs
|Short Russell ETFs||Ticker||Net Assets ($M)||Expense Ratio||Leverage||10-Day Volume (Avg)|
|Direxion Daily Small Cap Bear 3X Shares||TZA||$526||1.07%||3X||13,988,740|
|ProShares Short Russell2000||RWM||$445||0.95%||1X||1,056,058|
|ProShares UltraPro Short Russell2000||SRTY||$151||0.95%||3X||4,638,339|
|ProShares UltraShort Russell2000||TWM||$114||0.95%||2X||1,597,720|
|ProShares Short MidCap400||MYY||$32||0.95%||1X||31,546|
|ProShares UltraPro Short MidCap400||SMDD||$13||0.95%||3X||33,262|
|ProShares Short SmallCap600||SBB||$12||0.95%||1X||3,894|
|ProShares UltraShort SmallCap600||SDD||$7||0.95%||2X||10,685|
|Direxion Daily Mid Cap Bear 3X Shares||MIDZ||$6||1.08%||3X||0|
|ProShares UltraShort MidCap400||MZZ||$4||0.95%||2X||7,170|
Short Oil ETFs
|Short Oil ETFs||Ticker||Net Assets ($M)||Expense Ratio||Leverage||10-Day Volume (Avg)|
|ProShares UltraShort Bloomberg Crude Oil||SCO||$80||0.95%||2X||2,838,394|
|Direxion Daily S&P Oil & Gas Exp. & Prod. Bear 2X Shares||DRIP||$49||1.07%||2X||366,216|
|MicroSectors U.S. Big Oil Index Inverse ETNs||YGRN||$31||0.95%||1X||267|
|ProShares UltraShort Oil & Gas||DUG||$21||0.95%||2X||63,022|
Short Gold ETFs
|Short Gold ETFs||Ticker||Net Assets ($M)||Expense Ratio||Leverage||10-Day Volume (Avg)|
|Direxion Daily Gold Miners Index Bear 2X Shares||DUST||$131||1.07%||2X||4,581,334|
|Direxion Daily Junior Gold Miners Index Bear 2X Shares||JDST||$94||1.10%||2X||5,423,593|
|ProShares UltraShort Gold||GLL||$27||1.32%||2X||35,139|
|DB Gold Double Short ETN||DZZ||$6||0.75%||2X||5,802|
|DB Gold Short ETN||DGZ||$3||0.75%||2X||1,863|
Short / Inverse International ETFs
|Short International ETFs||Ticker||Net Assets ($M)||Expense Ratio||Leverage||10-Day Volume (Avg)|
|ProShares Short MSCI Emerging Markets||EUM||$62||0.95%||1X||73,966|
|Direxion Daily MSCI Real Estate Bear 3X Shares||DRV||$40||1.08%||3X||173,320|
|Direxion Daily MSCI Emerging Markets Bear 3X Shares||EDZ||$35||1.08%||3X||197,446|
|ProShares UltraShort MSCI Brazil Capped||BZQ||$29||0.95%||2X||769,465|
|ProShares Short MSCI EAFE||EFZ||$28||0.95%||1X||15,882|
|ProShares UltraShort MSCI Emerging Markets||EEV||$12||0.95%||2X||11,774|
Inverse ETF Performance vs. The S&P 500
The long-term performance of inverse ETFs does not match the performance of the underlying index. In this example, you can see a 1-year chart of the S&P 500 versus the ProShares UltraShort 2X Inverse leveraged ETF. This is the chart spanning the Corona Virus Crash in March 2020.
1 Year 2X Inverse ETF vs. S&P 500 Performance.
- The S&P 500 Index gained 13%
- The ProShares UltraShort 2X lost 46%
From October 25, 2019, to October 25, 2020, the 2X Short ETF made a loss of 3 times that of the gain in the S&P 500. This is much more than the expected 2X loss.
1 Month 2X Inverse ETF vs. S&P 500 Performance.
- The S&P 500 Index lost 33%
- The ProShares UltraShort 2X gained 89%
From February 18, 2020, to March 23, 2020 (the exact period of the stock market crash), the 2X Short ETF made a gain of 3 times that of the loss in the S&P 500. This is much more than the expected 2X gain.
Inverse ETF Summary
Timing is crucial when trading Inverse ETFs. The chart above highlights that you cannot expect the 2X or 3X leverage to hold true in the longer-term. But in the short-term, inverse ETFs are a great way to hedge your bets or bet against the market.