The Next Level of Inverse ETFs - dummies

By Paul Mladjenovic

How bearish are you? Or rather, how much of your neck will you put on the line with your bearish expectations? The type of inverse exchange-traded fund (ETF) that you choose to employ depends on how deeply you believe that your outcome will materialize and how aggressive you want to be. Inverse ETFs aren’t all or nothing. There’s one that fits each level of bear there is:

  • Double short ETFs: A double short inverse ETF (also called a 2X short ETF) seeks to double the opposite move of the underlying security or asset. For instance, if an investment goes down 5 percent, then the accompanying double short inverse ETF will go up 10 percent (or pretty close to that).

  • Triple short ETFs: Time to light the TNT. The triple short ETF (also called a 3X short ETF) is your choice if you really, really, truly believe with all your heart (and research) that a particular investment is going down — soon. If that investment goes down, say 10 percent, the accompanying triple short inverse ETF would go up 30 percent.

Consider the double and triple short ETFs only in markets that are volatile and in trouble. Make sure (double and triple sure!) that the investment you’re bearish on exhibits bright red flags in terms of technical analysis and fundamental values. Understand concepts such as being overbought and other indicators that may warn you of a reversal in the investment’s price action.

Double short and triple short ETFs are more than a double-edged sword. They’re more like a double-edged buzz saw. When you’re right, you’re profitably right, but when you’re wrong, you’re truly financially whacked!