An inverse ETF is one which is designed to have a perfectly inverse correlation to a given underlying, such as SPXU and SPY, which is also an example of a leveraged ETF.
One big advantage of inverse ETFs is that they can be used in retirement accounts where shorting stocks is not allowed. However, the rebalancing drag seen in inverse and leveraged ETFs tends to throw off their returns over the longer term. They also have a high cost of carry.
An table of inverse ETFs and leveraged products with a daily volume greater than 1 Million shares was displayed. The table include 1x, 2x and 3x leveraged ETFs. A table of the accuracy of the inverse relationship between TLT (Bond ETF) and TBT (2x leveraged inverse Bond ETF) was shown. The table included the average TLT movement, expected TBT movement, average actual TBT movement and the amount of drag on daily, weekly and monthly returns.
The table showed that in the longer term the drag was substantial. Another table demonstrated this using IWM (Russell 2000 ETF) and the TZA (Inverse 3x Russell 2000 ETF). A final table demonstrated the drag during a period of implied volatility (IV) expansion in TLT and TBT from 2008-2009.
For more on the use of Inverse ETFs you can watch:
Strategies for Your IRA from September 14th, 2015: “Trading Inverse ETFs"
Watch this segment of “Options Jive” with Tom Sosnoff and Tony Battista for the valuable takeaways and a better understanding of inverse ETFs and how they work.
This video and its content are provided solely by tastylive, Inc. (“tastylive”) and are for informational and educational purposes only. tastylive was previously known as tastytrade, Inc. (“tastytrade”). This video and its content were created prior to the legal name change of tastylive. As a result, this video may reference tastytrade, its prior legal name.