Introduction

Inverse ETFs, or exchange-traded funds, allow investors to profit from the decline of a specific market or index. These financial instruments achieve this by inversely tracking the performance of a benchmark, such as the S&P 500, NASDAQ-100, or a specific sector. Here are the seven best inverse ETFs investors should consider adding to their portfolios.

1. ProShares Short S&P 500 (SH)

The ProShares Short S&P 500 ETF seeks to provide the inverse daily performance of the S&P 500 Index. When the index goes down, this ETF goes up, allowing investors to profit from declining markets. SH is an excellent starting point for investors looking to bet against U.S. large-cap stocks.

2. ProShares UltraPro Short QQQ (SQQQ)

SQQQ is an aggressive inverse ETF that aims to deliver three times the inverse daily performance of the NASDAQ-100 index. This strategy entails higher profits if the market declines but carries a higher degree of risk due to its leverage.

3. Direxion Daily Small Cap Bear 3X Shares (TZA)

This ETF targets small-cap stocks by seeking to replicate three times the inverse daily performance of the Russell 2000 Index. Investors who believe small-cap stocks will underperform can consider TZA as a tactical approach to capitalize on this bearish sentiment.

4. ProShares Short Russell 2000 (RWM)

RWM offers exposure similar to TZA but without leveraging, providing an inverse daily return equal to the Russell 2000 Index’s performance. This fund is suitable for those with a more conservative approach and exhibits less volatility compared to leveraged funds like TZA.

5. ProShares UltraShort S&P 500 (SDS)

SDS provides two times the inverse daily performance of the S&P 500 Index. This leveraged ETF offers a higher return if the market declines but also exposes investors to greater risk and volatility.

6. ProShares UltraPro Short S&P 500 (SPXU)

This ETF aims to deliver three times the inverse daily performance of the S&P 500 Index. Like other leveraged inverse funds, SPXU offers higher potential gains during a market downturn but also involves a greater degree of risk.

7. ProShares UltraShort 20+ Year Treasury (TBT)

TBT is an inverse bond ETF designed to provide two times the inverse performance of the ICE U.S. Treasury 20+ Year Bond Index. This fund is an excellent choice for investors anticipating a rise in interest rates, as higher rates negatively affect long-term bond prices.

Conclusion

Inverse ETFs can be an effective tool for investors looking to hedge against market risk or capitalize on declining markets. However, it’s essential to understand their unique characteristics and risks before investing, particularly when using leveraged funds. By focusing on the best inverse ETFs available, investors can construct a diversified portfolio that extends beyond traditional assets and bet against the market when needed.