Do you silently detest finance editors who make grim market predictions every morning when you open your newspaper? Are you worried about your financial future because of the constant rumors of an impending end? In either case, you can profit from these news stories about doomsday-like events by investing in the right fund-inversely exchange-traded funds.
You can hedge your chances of success by buying an inverse ETF, while the rest of the world bets on the markets rising.
Let's break down the term "inverse ETF" to better understand it. An exchange-traded mutual fund (ETF), is a type fund which is traded on a stock exchange . A collection of securities such as stocks that tracks the performance of a benchmark. NIFTY 50 ETF tracks, for instance, the NIFTY 50 Index. An investor who has NIFTY 50 ETF units will hope for the index's rise. If they decide to sell, the investor will also make a profit.
This ETF is beneficial when the index it tracks falls. It is composed of derivatives such as options, futures contracts and swaps. An inverse ETF is also known as a "short ETF" or "bear ETF". A "bear market" is one in which a market experiences a drop in price.
Inverse ETFs are reliant on derivatives to provide returns for their investors. Inverse ETFs invest in daily futures. A futures contract is also known as a futures agreement. It allows two parties to agree to purchase or sell a security or asset at an agreed price at a later date. An investor or fund manager purchases a futures contract to bet on the market falling. The inverse ETF rises by 2% if the index falls by 22%. Because it is based upon derivatives like futures contracts that are traded daily, an inverse ETF can be a short-term investment.
Are you convinced that the benchmark index will continue its decline? Your confidence, knowledge and tolerance for risk are all in line with your inverse ETF's performance. The index can also be boosted by borrowing, in addition to derivatives.
Leveraged inverse ETFs can increase returns by as much as a factor of 2 or 3. This means that your leveraged inverse ETF 3x will increase 9% if the NIFTY50 falls by 3% in the previous example.
It is a counterbalance for traditional ETFs in your portfolio. An inverse ETF can be attached to a benchmark index if you have traditional ETFs. This means that even if the index loses some points, the inverse ETF will make up the difference.
It functions as an alternative to standard ETFs in your investment portfolio. Inverse ETFs are those that track the same benchmark index as standard ETFs. If the index loses point, the inverse ETF will compensate for the loss.
The high expense ratios are the first problem. This is because inverse ETFs can be actively managed funds. You will however be more rewarded if you only own inverse ETFs for short periods of time.
Inverse ETFs will likely underperform over the long-term. It is better to short stocks than index funds.
Now you know what an inverse ETF looks like and how it works. Angel One, India's leading brokerage house, will review your investment requirements and determine if the inverse ETF is a good fit for your portfolio.