Archive for the ‘ETF’ Category
Pitfalls of Inverse ETFs
Suppose you believe that the market is going to go down, what would you do? Normal answer is sell what you have and get out. However, what if you have nothing to sell? Till a couple of years ago, the answer would have been "Stay on the sidelines" for simple investors. The sophisticated investors always had plenty of avenues – Shorting the stock, buying puts, selling naked calls, etc. However, the gap was narrowed with the arrival of Inverse ETFs that allows even novice investors to short the market in a less risky way (you cannot lose more than what you put in the ETF, while in shorts your loss is theoretically unlimited and this can be psychologically unsettling for some). However, the power and pitfalls of these instruments are poorly understood by many, particularly by the long term investors. The power is obvious – you can go 1/X or 2/X of the market pretty easily leaving all the pesky details of achieving them to the ETF managers. Here are the pitfalls.
