Inverse ETFs Explained: How They Work and When Investors Use Them

MF3d / Getty Images/iStockphoto

Commitment to Our Readers

GOBankingRates' editorial team is committed to bringing you unbiased reviews and information. We use data-driven methodologies to evaluate financial products and services - our reviews and ratings are not influenced by advertisers. You can read more about our editorial guidelines and our products and services review methodology.

20 Years
Helping You Live Richer

Reviewed
by Experts

Trusted by
Millions of Readers

Inverse ETFs are designed for investors who want to profit when markets or specific sectors fall. Instead of rising when an index goes up, these funds aim to move in the opposite direction — making them a tactical tool rather than a long-term holding.

Used carefully, inverse ETFs can help hedge portfolios, manage short-term risk or express a bearish market view. Used incorrectly, they can amplify losses due to leverage and daily resets.

Inverse ETFs — At a Glance

ETF	Ticker	Tracks	Risk Profile	Why It Stands Out
ProShares Short S&P 500	SH	S&P 500	Moderate	Simple, non-leveraged market hedge
ProShares UltraShort S&P 500	SDS	S&P 500 (-2x)	High	Amplified downside exposure
ProShares Short QQQ	PSQ	Nasdaq-100	Moderate	Targets tech-heavy index declines
ProShares UltraShort QQQ	QID	Nasdaq-100 (-2x)	High	Leverage tied to growth-stock pullbacks
ProShares Short Dow30	DOG	Dow Jones Industrial Avg	Moderate	Blue-chip downside hedge

Inverse ETFs reset daily and are generally intended for short-term use.

What Is an Inverse ETF?

An inverse ETF is a fund designed to deliver the opposite daily performance of an underlying index. If the index falls 1% in a day, a standard inverse ETF aims to rise by about 1% before fees and expenses.

Some inverse ETFs also use leverage, targeting two or three times the inverse of daily returns. These products rely on derivatives and daily rebalancing, which makes them unsuitable for long-term buy-and-hold strategies.

How Inverse ETFs Work

Inverse ETFs achieve their returns through financial instruments rather than short selling stocks directly.

• Daily resets mean performance is calculated one trading day at a time
• Derivatives exposure includes swaps and futures contracts
• Compounding effects can distort returns over longer periods

The Securities and Exchange Commission has cautioned that leveraged and inverse ETFs behave differently over time than many investors expect.

When Investors Use Inverse ETFs

Inverse ETFs are typically used in specific scenarios.

Short-term HedgingInvestors may use inverse ETFs to offset potential losses during market pullbacks without selling core holdings.

Tactical Bearish PositionsTraders sometimes use inverse ETFs to express short-term negative views on markets or sectors.

Volatility ManagementInverse ETFs can help reduce portfolio sensitivity during periods of heightened uncertainty.

They are generally not designed for long-term exposure.

Risks of Inverse ETFs

Inverse ETFs carry risks beyond traditional ETFs.

• Tracking error can increase over time
• Daily compounding can erode returns in choppy markets
• Leverage magnifies losses as well as gains

The Financial Industry Regulatory Authority notes that these products are complex and best suited for knowledgeable investors.

Inverse ETFs vs Other Bearish Strategies

There are multiple ways to position for downside risk.

• Inverse ETFs vs short selling: No margin account required, but daily resets add complexity
• Inverse ETFs vs options: Options offer defined risk but require strategy knowledge
• Inverse ETFs vs cash: Cash reduces risk but does not profit from declines

Inverse ETFs sit between simplicity and sophistication.

How To Invest in Inverse ETFs

If you’re considering inverse ETFs, follow a structured approach.

Step 1: Confirm suitabilityEnsure inverse ETFs match your experience level and time horizon.

Step 2: Choose exposureSelect broad-market or sector-specific inverse ETFs.

Step 3: Limit position sizeUse small allocations to manage risk.

Step 4: Monitor dailyBecause of daily resets, inverse ETFs require frequent oversight.

Step 5: Exit intentionallyThese products are often held for days, not months.

Final Take to GO: Are Inverse ETFs Worth Considering?

Inverse ETFs can be useful tools for short-term risk management or tactical market views, but they are not set-and-forget investments. Their structure makes timing, monitoring and discipline essential.

For investors seeking downside protection, inverse ETFs may complement other strategies — but only when used with a clear plan and a full understanding of their risks.

Information is accurate as of Jan. 14, 2026.

Editorial Note: This content is not provided by any entity covered in this article. Any opinions, analyses, reviews, ratings or recommendations expressed in this article are those of the author alone and have not been reviewed, approved or otherwise endorsed by any entity named in this article.

Share This Article: