If you have ever lost money in the stock market because you listened to investment guru Jim Cramer, there’s a new exchange-traded fund (ETF) for you. The Inverse Cramer ETF “shorts,” or bets against, a portfolio of picks mentioned by Cramer, the popular CNBC host of Mad Money. If Cramer’s picks collectively fall by 5%, the ETF is designed to rise 5%.
There are more than 100 inverse ETFs that use financial derivatives such as options and futures to produce the opposite returns of underlying indexes or asset classes. Examples: You can short the Dow Jones Industrial Average and the S&P 500 index as well as Bitcoin, big oil, banks, biotech and semiconductor stocks. You even can use ETFs to short the stock of specific companies. Some inverse ETFs use leverage to enhance outcomes, so if the Russell 2000 small-cap index falls, the ETF that shorts the index rises two or three times as much. We asked Neena Mishra, CFA, ETF research director at Zacks Investment Research, for her take…
In a bear market or a correction, these ETFs are easy-to-use bets that can make you money. But unless the timing for getting in and out of the funds is precise, inverse ETFs could spell financial ruin for most long-term investors. Not only do they charge expense ratios in the 1% range, but when stocks rise, inverse ETFs decline in value. Further, these ETFs are designed to achieve their stated performance goal on a daily basis. Over a period longer than one day, their performance can differ significantly from their stated daily performance objectives.
Example: The ProShares Short QQQ, which delivers the inverse returns of the NASDAQ 100 index, soared 36% in last year’s bear market. But over the past 10 years, it lost an average of 18% a year. Investing in broad stock indexes over time is a lot more profitable and less nerve-wracking than investing against them.
That said, there is one short-term tactical strategy in which inverse ETFs can be useful—for hedging to protect a position in your portfolio. Example: You have a substantial amount of money invested in an S&P 500 index fund in a taxable account. You’re worried about a recession and a stock market plunge in the short term, but you don’t want to sell shares in your fund and go to cash because you’ll incur big capital gains taxes. Your goal is to maintain your holdings but mute your potential for losses. In the past, you might have increased your exposure to bonds, which often rise when the S&P 500 falls. But in a rising interest rate environment, bonds can be risky and unpredictable. Instead, you can invest in the ProShares Short S&P 500 ETF (SH), so if the stock market falls, the value of the ETF rises, partially offsetting some losses. If the market rises, your ETF shares would drop and detract from overall gains.