Do you ever open your newspaper and curse finance editors for making so many gloomy predictions about the market? You might be questioning your investment strategy because of the constant news about an impending apocalypse. You can still benefit from these news stories that sound doomsday-like by investing in the right funds- inverse exchange traded funds.
The rest of the world depends on the markets to thrive, but you can hedge your bets by investing in an ETF inverse.
What does this mean? Well, let us explain.
Let's take a look at the term "inverse ETF" to better understand it. An exchange-traded fund is an ETF. An ETF is a group of securities, such as stocks, that track a benchmark index. A NIFTY 50 ETF, for example, tracks the NIFTY 50 Index. Investors who hold units of the NIFTY50 ETF will pray for the NIFTY50 to gain. Investors will see an increase in the value and potential benefits of the ETF's tracking assets.
Let's now look at the 'inverse' specifier. This type of ETF gains if the index it tracks drops, as the name suggests. If there is an NIFTY50 inverse ETF, the investors holding units of this fund will be delighted when the Bloomberg reporter informs them that the NIFTY50 has lost a few points.
It uses derivatives like futures contracts and options. Swaps are also used. An inverse ETF can also be called a short ETF', bear ETF/a> or a?bear ETF. A market is considered a bear in financial market terms when its price falls.
To make its investors money, Inverse ETFs bank on their derivatives. Inverse ETFs typically invest in daily futures. A futures contract, also known as a futures contract, is an agreement between two people to purchase or sell a security or asset at a certain time and at a specific price. An investor or fund manager enters into a futures contract hoping that the market will fall. The inverse ETF will rise by 2 percent if the index falls by 2 percent.
An inverse ETF, which is based upon derivatives such futures contracts that are traded daily is a short-term investment.
Are you confident about the direction of the benchmark index's downward trend? If your knowledge, confidence and risk-taking appetite are in agreement, you can leverage your inverse ETF to increase its performance. You can also use debt to increase the index's returns, in addition to derivatives.
Leveraged inverse ETFs can increase returns by as much as 2:1 or even 3:1. If the NIFTY 50 loses 3 percentage, your leveraged inverse ETF can gain 9 percent.
An inverse ETF has two important benefits:
It acts as a hedge against conventional ETFs in an investment portfolio. If you have conventional ETFs that track a benchmark index, having an inverse index tied to that index will ensure that your inverse ETF is able to make up the difference in the event of a loss.
An inverse ETF is a fund that allows investors to short stock stocks but not have the funds or the broker's margin account. In this way, investors don't lose anything if things don’t go according to plan. This is unlike a margin account, where they can lose all their collateral.