Should you use inverse ETFs to protect yourself from a market crash?
2022 recorded the worst first half for the S&P 500 since 1970 — falling over 20% by June 30. Still, there was no shortage of savvy, lucky, or risk-oblivious investors turning a profit during the bear market.
A popular tool to bet against the market is inverse ETFs like the ProShares Short S&P 500 (NYSE:SH) — which aims to deliver the daily 1x inverse return of the S&P 500. If the S&P 500 went down 1% in a day, would rise 1%.
WARNING: Inverse ETFs generally make for poor long-term holds, and they:
- …are only accurate for a single day. If the S&P 500 is down 5% for the week, the inverse ETF won’t be up exactly 5%. The difference can become even larger during longer holding periods.
- …charge high expense ratios. charges 0.88% annually (i.e., $88 in fees on a $10,000 investment) vs. the 0.03% charged by the Vanguard 500 Index Fund ETF (NYSE:VOO) — ~30x cheaper.
Want more reasons to avoid inverse ETFs?
1/ “Stonks go up” (in the long run). The S&P 500 returned an average annual return of 10.5% since 1957, and betting against it would have been a losing battle. If you bought, your long-term return would have looked like the chart above.
2/ They give investors another decision to make. Now that we know they’re bad long-term investments, those who bought inverse ETFs have another decision to make: when to sell? And we know investors are notoriously bad at market timing.
Can’t resist inverse ETFs? Make sure your plan is short-term. Set risk management guidelines for position sizes, take profits and set stop-losses. Sounds like too much hassle? Sticking to low-cost, “vanilla” ETFs might be a better option.
