Author Topic: Inverse ETF's  (Read 2213 times)

Le Poisson

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Inverse ETF's
« on: May 26, 2015, 09:31:16 AM »
Can anyone explain to me how an inverse ETF works? How can they predict what will go up when the market goes down?

The lit I found says these are for a long position - does this mean you should buy into them if you expect a long downturn in the market? If you expect the market to go up why would you take a long term position on the inverse? How long is 'Long Term' for these? If you wait long enough, eventually everything goes up. Unless it dies. Then its just dead.

Reference: https://www.investorbootcamponline.com/blog/TSX-traded-inverse-etfs.php

Anyways, if anyone can explain the nuts and bolts of these in simpleton speak, I'd appreciate it.

forummm

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Re: Inverse ETF's
« Reply #1 on: May 26, 2015, 09:42:57 AM »
There are single inverse. And there are multiples too--like 3x and -3x. These multiples are generally *not* for long positions. The funds' own literature says only for daily positions. But some people use them for long positions anyway. Basically both the bull and bear versions use leverage and derivatives to achieve the desired market exposures. So a Vanguard fund just owns a bunch of stock and whatever the stocks do, your fund does. But these inverse and multiples funds either own no or only few stocks. Usually they own futures contracts or swaps or some other contract where they pay a premium to a counterparty and the counterparty agrees to take the opposite bet of the fund. The funds don't move exactly like the target over a long period of time.

hodedofome

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Re: Inverse ETF's
« Reply #2 on: May 26, 2015, 02:19:28 PM »
Yeah I don't feel like posting the backtest but I just quickly ran a portfolio of 50% SPY and 50% SH (Inverse S&P 500 ETF) from inception date of SH in June 2006. Without rebalancing, compound return is 2.1% and max drawdown is 18%. If if was truly perfectly inverse, the portfolio should go nowhere. So the tracking error over the long term is real.

NorCal

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Re: Inverse ETF's
« Reply #3 on: May 27, 2015, 11:31:17 AM »
In laypersons terms, these are only good for day-traders, and have no place in a long term portfolio.

They attempt to track daily moves in a portfolio, which can be dramatically different than monthly or annual moves.

In addition, they are constructed using underlying derivatives contracts and not actual shares or holdings.  These derivatives contracts have a time-value that decays as you hold it.

forummm

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Re: Inverse ETF's
« Reply #4 on: May 27, 2015, 11:36:11 AM »
In laypersons terms, these are only good for day-traders, and have no place in a long term portfolio.

They attempt to track daily moves in a portfolio, which can be dramatically different than monthly or annual moves.

In addition, they are constructed using underlying derivatives contracts and not actual shares or holdings.  These derivatives contracts have a time-value that decays as you hold it.


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