Inverse ETFs Explained: How to Bank When The Market Falls

Did you know you don’t have to Short anything in the market to make money when it crashes?  It’s true, and a lot of traders don’t know how, but Black Ink Economics is here to fix that now!  The following will discuss some very special trading tools (ticker symbols) that are built specifically with the purpose of popping when the market falls.  Using these tickers on red days can save your portfolio, and even grow it when the next recession inevitably arrives.

One thing that drives us here at Black Ink Economics is our desire to make trading totally accessible to everyone. We can’t stand that Financial professionals try to confuse people in order to take advantage of them. And today we are going to take those Elitists down a peg by exposing one of the biggest ways they continue to profit even when the markets in free fall: Inverse ETFs and ETNs.

Inverse ETFs (Exchange Traded Funds) trade just like stocks. You can go into any broker and type in one of the ETF ticker symbols and place an order the exact way you buy stocks. The “Inverse” part is key, because it means that it “shorts” a particular market segment and allows people like you and me to buy shares that are guaranteed to rise if that specific market segment falls.  Almost all Inverse ETFs have sister ETFs that are not inverse. This is a helpful tidbit that we will dive into more later.

The same thing goes for Inverse ETNs (Exchange Traded Notes) in that they will rise when the bond markets which they short fall. Don’t let the difference between ETN and ETF confuse you, for our purposes we are just going to look at how they are similar.

Both the Inverse ETFs and Inverse ETNs are specifically built to rise when the markets fall. It’s not an accident, and it’s not speculative in that “yes or no” sense. If the markets drop, Inverse ETFs and ETNs pop. That’s a plain and simple, objective fact.  The speculative side is guessing the general market trend.

Explaining each and every one of these would take too much time. So if you are curious about a particular one, know that each has a “Prospectus” that is online which explains the intricate way that particular ticker works (we have linked to them respectively below). But generally, here are the Inverse tickers we trade most often and what those ETFs/ETNs are based on:

Note: There are many more inverse tickers that are fun to play, but they don’t correlate with general market moves so we are leaving them off the previous list.  But you can find an Inverse ETF to bet against oil prices, gold prices, housing prices, regional banks, every currency out there, etc.

For example, any ETF shorting oil could also rise when the markets sell off.  So it’s important to know what exactly you are shorting. On red days, we prefer being involved in funds which short technology, semiconductors, Midcaps, Smallcaps, and entire markets like the Dow, S&P500, Russell2000, etc.  

As a trading strategy, we generally prefer not to day trade. Especially with ETFs, because they tend to make their biggest moves during the premarket hours.  So at the end of each day, it’s good to take a quick mental inventory of what is in the cards for the next day. In times like these, where we have an overheated economy, expansionary monetary policy, and a trade war with multiple countries, there are many news events to consider in addition to the Microeconomic events like Fed meetings and Jobs numbers.  

One important thing to realize about these ETFs/ETNs, is that they are based on an underlying real asset value. And for the most part, they end the aftermarket trading within 2% of the stated value (called the NAV). The companies that create these trading vehicles are required to publish the NAV of each of the shares after the market closes but before the aftermarket closes. Then, Market Makers are paid to get the actual price to be as close to the listed price as possible, and they do not fail for the vast majority. So it’s not speculation that drives the value of these shares, at least not directly. It’s actual value of shares held within the fund.

Finally, when you analyze a potential entry in an Inverse ETF/ETN, remember that each day is independent of the last. Much like you’d look at tossing a coin, previous observations don’t impact the next observation much at all. If the market continues to sell off, like it would in any correction or recession, most of the inverse trades will continue to rise.

Before we end this quick report about Inverse ETF/ETNs, I want to go back to a point made earlier about the “sister” funds of these.  Generally speaking, each Inverse ETF has an opposite trade that goes long the exact same set of stocks that the Inverse ETF is short. For example, LABD and LABU trade opposite each other.  UVXY trades opposite SVXY. SQQQ trades opposite TQQQ. But even if the inverse ETF your looking at doesn’t have a sister trade, there are most definitely other ETFs that accomplish the same thing.  For example, TVIX had a sister fund that was liquidated last year when it crashed. But SVXY trades almost exactly the opposite of TVIX, so you still have options. The point here is that a lot of traders decide to only play ETFs and Inverse ETFs and some traders even simply stick to the same set of ETFs going back and forth with each cycle, so it’s something worth studying!

Inverse ETF’s and ETN’s are wonderful, short term, trading tools.  They allow traders to short entire industries instead of trying to guess which individual stock might have a big day.  On green market days, speculative traders like us at Black Ink Economics like to take long positions in a set of bullish looking stocks.  But when the market is falling, it is much easier to simply bet against an entire industry. And especially when the economy enters the next recession, keep these tickers on your watchlist.  Because you CAN grow your portfolio when everyone else is losing money, if you just study up!

There are exceptions to every rule, and you should do more DD on these before you make any big decisions.  There are some hard lessons to learn if you don’t read the prospectus. Some of these inverse trades have huge fees, for example!  Others have rules where if they lose a certain value in a given time period, then they will be liquidated. You always need to do research. Especially since we don’t actually give investment advice.  Let me have a lawyer spell it out for you:

No information expressed or distributed by Black Ink Economics constitutes investment, trading, or financial advice. Black Ink Economics’s mission is to educate people on how to trade and to further people’s knowledge as to the workings of the financial markets.  Any information presented or distributed by Black Ink Economics is for education and entertainment purposes only.

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