Skip to main content

Soaring stock markets tend to make investors nervous.

"With markets at record highs, I'm looking for products to hedge my portfolio in the event of a downturn," a reader writes. "What is your opinion about inverse ETFs?"

Inverse exchange-traded funds use financial instruments called derivatives to provide the inverse return of a particular stock index over a one-day period. If the index plunges 5 per cent, holders of the inverse ETF make 5 per cent. There are also inverse funds that provide double the inverse return of an index and, in the U.S. market, triple the inverse.

Story continues below advertisement

In a fast-falling market, you can make a lot of money quickly with inverse ETFs. The problem is in buying and selling them at the right time. It's so difficult to do that I suggest these investments only for active traders who monitor and adjust their holdings on a day by day and even an hour by hour basis. Inverse ETFs as a hedge for the typical individual investor? Take a pass.

The reason to avoid inverse ETFs is tied to the difficulty of timing a stock market decline. If you buy an inverse ETF and the market goes up, you will lose money. The BetaPro S&P/TSX 60 Daily Inverse ETF (HIX) lost 0.7 per cent November, while the target S&P/TSX 60 total return index made 0.7 per cent.

If you keep holding an inverse ETF indefinitely while you wait for a downturn, you could lose more than the opposite of the target index return. HIX lost an annualized 8 per cent for the three years to Nov. 30, while the index gained 6.5 per cent. In a sense, this is an unfair comparison because you really shouldn't maintain a position in an ETF like HIX for that long. You either hold it for a one-day period, or hold for longer while making daily adjustments in your position to ensure you're still on track to get the exact inverse of the market.

Remember bonds? They're the everyday investor's hedge against a stock market decline. Guaranteed investment certificates are great as well, provided you don't need liquidity.

Report an error Editorial code of conduct
Tickers mentioned in this story
Unchecking box will stop auto data updates
Comments

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

Comments that violate our community guidelines will be removed.

If your comment doesn't appear immediately it has been sent to a member of our moderation team for review

Read our community guidelines here

Discussion loading…

Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.