An inverse ETF is an <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" dir="ltr" href="https://www.investopedia.com/terms/e/etf.asp">exchange traded fund (ETF) </a>constructed by using various <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" dir="ltr" href="https://www.investopedia.com/terms/d/derivative.asp">derivatives </a>to profit from a decline in the value of an underlying benchmark. Investing in inverse ETFs is similar to holding various short positions, which involve borrowing securities and selling them with the hope of repurchasing them at a lower price. An inverse ETF is also known as a "Short ETF" or "Bear ETF."

What Is an Inverse ETF?

<ul><li>An inverse ETF is an exchange traded fund (ETF) constructed by using various derivatives to profit from a decline in the value of an underlying benchmark. </li><li>Inverse ETFs allow investors to make money when the market or the underlying index declines, but without having to sell anything short. </li><li>Higher fees tend to correspond with inverse ETFs versus traditional ETFs. </li> </ul>

Key Takeaways

Many inverse ETFs utilize daily futures contracts to produce their returns. A <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" dir="ltr" href="https://www.investopedia.com/terms/f/futurescontract.asp">futures contract </a>is a contract to buy or sell an asset or security at a set time and price. Futures allow investors to make a bet on the direction of a securities price. Inverse ETFs' use of derivatives—like futures contracts—allows investors to make a bet that the market will decline. If the market falls, the inverse ETF rises by roughly the same percentage minus fees and commissions from the broker.

Understanding Inverse ETFs

An advantage of inverse ETFs is that they do not require the investor to hold a <a href="https://www.investopedia.com/terms/m/marginaccount.asp" rel="noopener noreferrer" target="_blank">margin account </a>as would be the case for investors looking to enter into <a href="https://www.investopedia.com/terms/s/short.asp" rel="noopener noreferrer" target="_blank">short positions </a>. A margin account is one where a broker lends money to an investor to trade. Margin is used with shorting—an advanced trading activity.Investors who enter into short positions borrow the securities—they don't own them—so that they can sell them to other traders. The goal is to buy the asset back at a lower price and unwind the trade by returning the shares to the margin lender.

Inverse ETFs vs. Short Selling

An inverse ETF is an exchange-traded fund that uses various derivatives to profit from a decline in the value of an underlying benchmark.

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Exploring the Benefits and Risks of Inverse ETFs

Despite news headlines on life-changing investments on one stock item like GameStop, it is too risky to make short-term bets with sizable sums of money on what a stock is going to do next. Instead, some of the most respected investors in the world have long said the best way for everyday investors to make money is to invest in index funds and hold those investments over long periods of time.Most index funds offer low fees and will allow you to essentially buy the entire stock market. That way, if any one stock crashes it won't affect your portfolio.&nbsp;

Betting on a hot stock isn't worth it

The key to everyday investing is diversification, which means owning different types of investments to spread out the risk. You definitely want to own stock index funds because stocks over time have always offered the best return.&nbsp;You need investments that can do well when stocks are doing poorly. These include Treasury bonds and real estate funds.&nbsp;

Build a diverse portfolio

Checking in with a financial adviser is strongly recommended by experienced investors, but make sure you're speaking with a fee-only expert, who isn't receiving commissions for steering you into one investment over another.&nbsp;Once you find someone acting in your best interest, try to meet with them once a year or every two to three years. Find someone you can pay a flat fee for each visit. This will save you money in the long term.

Working with a financial adviser

There is no need to panic, even in times of big corrections in the market. With a diverse investment portfolio, you actually have an opportunity to make some extra money off of big swings in the markets by selling what has gone up in value and buying more of what's gone down.Don't panic and sell everything just because the stock market crashes and you see other people panicking and getting rid of their stocks. That can do irreparable harm to your portfolio. Buying high and selling low is not a good way to make money.

Rebalance your investments for stability

Investing in a smart way can get you set up for whatever the future may bring. But where to begin? Here are a few tips for those who are just entering the world of investing.

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New To Investing? Here Are Some Common Mistakes To Avoid And Tips To Follow 

It is defined as a perceived seasonal increase in stock prices during January.
Analysts generally attribute this rally (a period of sustained increases in the prices of stocks, bonds, or related indexes) to two factors.
<ol>
<li>A price drop happens in December - when investors prompt a sell-off due to tax-loss harvesting to offset realized capital gains - followed by an increase in buying in January.</li>
<li>Investors use year-end cash bonuses to purchase investments in January.</li>
</ol>

The January Effect

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The January effect was first noticed in 1942 but has been less pronounced in recent years. The hypothesis suggests that markets as a whole are inefficient. Efficient markets would not follow this effect.
Small caps - companies with a relatively small market capitalisation - are more affected by the January Effect than mid or large caps because they are less liquid.

Understanding The January Effect Hypothesis

Besides tax-loss harvesting and repurchases, and investors putting cash bonuses into the market, the January Effect is affected by investor psychology.
<ul>
<li>Some investors feel that January is the best month to begin an investment program.</li>
<li>Others think that mutual fund managers buy top performers&#39; stocks at the end of the year and dispense questionable losers for appearance sake in the year-end reports.</li>
<li>Year-end sell-offs attract buyers interested in the lower prices.</li>
</ul>

January Effect Explanations

<ul>
<li>A study analysing data between 1904 and 1974 revealed that the average return for stocks during January was five times higher than any other month, particularly in small-capitalisation stocks.</li>
<li>Another study from 1972 to 2002 found that the Russell 2000 index stock outperformed stocks in the Russell 1000 index in January.</li>
<li>The stocks outperformed by 0,82% and underperformed during the rest of the year.</li>
</ul>
But it is suggested that too many people now time for the January Effect so that it becomes priced into the market, levelling out the effect.

Studies and Criticism

Money

January Effect

The Nasdaq (National Association of Securities Dealers Automated Quotations) is the oldest and largest electronic stock market globally. All its buying and selling occurs electronically and not on a physical trading floor. 
It is the second-largest stock exchange globally based on the market capitalisation of its listed companies.

Nasdaq overview

Nasdaq is technically a dealer market. Both buyers and sellers trade with a market maker in a specific stock or security.
<ul>
<li>3,889 listed companies trade on Nasdaq and represent 10 broad sectors or industry groups, mostly in technology, consumer services, and health care.</li>
<li>Nasdaq&#39;s listed companies combined are worth $11.23 trillion.</li>
<li>Over 4.5 billion shares are traded daily on Nasdaq.</li>
<li>Companies pay $47,000 to $163,000 in fees to be listed on Nasdaq.</li>
</ul>

Nasdaq facts

<ul>
<li>The Nasdaq was created in 1971 by the National Association of Securities Dealers (now known as FINRA). </li>
<li>At first, it was just a quotation system but began adding trading and transactional systems.</li>
<li>In 2002, Nasdaq became an independent, publicly-traded company.</li>
<li>In 2006, it became an SEC-registered national securities exchange.</li>
<li>In 2007, it combined with the OMX, the Scandinavian exchange group, to form the Nasdaq OMX group.</li>
</ul>

History of the Nasdaq

<ul>
<li>The Nasdaq Composite Index tracks 2,790 Nasdaq securities - almost everything except mutual funds, preferred stocks, and derivative securities.</li>
<li>The smaller Nasdaq 100 Index focuses on the largest, non-financial companies listed on the Nasdaq with over half in the tech sector.</li>
</ul>
The Nasdaq Composite is more influential and widely followed, while the Nasdaq 100 is viewed by traders and investors interested in futures, options, and exchange-traded funds.

The Nasdaq has two major indexes

Both the Nasdaq Composite and Nasdaq 100 use the same modified market capitalization weighting method: Each share&#39;s closing price (LSP) is multiplied by the total shares outstanding (TSO).
Share weights calculation: Each security&#39;s market capitalization is divided by the total capitalization of all index securities. Share weights for each stock are then multiplied by that stock&#39;s closing price. The total is divided by an index divisor that accounts for market fluctuations. The result is the Nasdaq average for that day.

Calculating the Nasdaq indexes daily average

Nasdaq&#39;s indexes have outperformed the S&amp;P 500 (it tracks large-cap stocks), and the Dow Jones Industrial Index (the 30 largest US companies).
It outperformed because both Nasdaq indexes lean heavily into tech, consumer services, and health care - the top-performing industries in recent years.

Performance of the Nasdaq indexes

While you can try to duplicate the Nasdaq 100 or the Nasdaq Composite with individual stock purchases, it would be more efficient to invest in an index fund.
<ul>
<li>The Invesco Unit Investment Trust QQQ ETF is the most popular Nasdaq index fund and tracks the Nasdaq 100.</li>
<li>Fidelity&#39;s Nasdaq Composite Index ETF is a popular exchange-traded fund for investing in the entire Nasdaq composite.</li>
<li>For a mutual fund, look at the Fidelity Nasdaq Composite Index Fund.</li>
</ul>
Nasdaq is also a public company that you can invest in. It trades as Nasdaq Inc.

How to invest in Nasdaq stocks

Nasdaq is the world's largest electronic stock exchange whose indexes, the Nasdaq Composite and the Nasdaq 100, are bellwethers for the tech sector.

What is the Nasdaq? Understanding the global stock exchange that's home to the fastest-growing, most innovative companies

<ol><li>If you have a 401(k) or another retirement plan at work, it’s very likely the first place you should put your money— especially if your company matches a portion of your contributions.</li><li>A robo-advisor.&nbsp;These services manage your investments for you using computer algorithms and&nbsp;typically costs 0.25% to 0.50% of your account balance per year.</li><li>Target-date mutual funds&nbsp;often hold a mix of stocks and bonds and automatically invest with your estimated retirement year in mind.</li><li>Index funds are like mutual funds on autopilot: Rather than employing a professional manager to build and maintain the fund’s portfolio of investments, index funds track a market index.</li><li>Exchange-traded funds.&nbsp;ETFs operate in similar ways as index funds:&nbsp;The main difference between ETFs and index funds is that rather than carrying a minimum investment, ETFs are traded throughout the day and investors buy them for a share price, which like a stock price, can fluctuate.</li><li>Investment apps&nbsp;like Acorns or Stash.</li></ol>

6 ideal investments for beginners

The biggest misconception about investing is that it's reserved for the rich. That might've been true to some extent 10 years ago. But that barrier to entry is gone today, knocked down by companies and services that have made it their mission to make investment options available for everyone, including beginners and those who have just small amounts of money to put to work.

doubleinverseetf

What Is an Inverse ETF?

Exploring the Benefits and Risks of Inverse ETFs

Betting on a hot stock isn't worth it

New To Investing? Here Are Some Common Mistakes To Avoid And Tips To Follow