Bear Market Exchange-Traded Funds

Bear market ETFs offer short market exposure to both commodities and equity indexes, without having to take a short position. Investors should not compare funds across the bear market category, as these funds vary significantly in terms of the underlying indexes and leverage. Inverse ETFs offer the exact opposite return of a particular index, using daily or monthly compounding, while leveraged inverse ETFs provide two or three times an index's return using the same compounding frequencies. The compounding and leverage attributes of these ETFs are what can make them risky.

To illustrate …

For example, a $100 investment in an inverse, two-times leveraged ETF tracking an equity index that gains 5% on day one would return negative 10% ($90 investment value). If the index then lost 5% on day two, the underlying index would be down only $0.25, while the leveraged inverse ETF would have lost $1. This negative effect grows with the volatility of the underlying index and the increased compounding frequency. Better options, such as monthly compounding or fixed-leverage ETFs, now exist.