can inverse etf go negative

Despite seeking to move inversely to the underlying index, inverse ETFs can indeed go negative if the index or benchmark unexpectedly rises or if the counterparty fails to fulfill its obligations due to counterparty risk.

Oct 11, 2024 at 08:23 pm

Can Inverse ETFs Go Negative?

Inverse exchange-traded funds (ETFs) seek to generate returns that are inversely correlated to their underlying index or benchmark. In other words, they seek to move in the opposite direction of the underlying asset.

Inverse ETFs often invest in futures contracts, options, or other derivative instruments to achieve their negative correlation. These instruments allow inverse ETFs to gain exposure to the inverse of the underlying index without actually owning the underlying assets.

So, can inverse ETFs go negative?

The answer is yes. Inverse ETFs can go negative if the underlying index or benchmark rises in value. This is because inverse ETFs use derivatives to create their negative correlation, and these derivatives can have counterparty risk. If the counterparty fails to meet its obligations, the inverse ETF may lose value.

For example, if an inverse ETF tracks the S&P 500 Index, and the S&P 500 rises by 1%, the inverse ETF would be expected to fall by 1%. However, if the counterparty to the ETF's derivatives fails to meet its obligations, the ETF could lose more than 1%.

Steps:

Expectedly falls by 1%
Counterparty fails to meet their obligation
Inversion ETF could lose more than 1%

Conclusion:

Inverse ETFs can be a useful tool for investors who are looking to profit from the decline of an index or benchmark. However, investors should be aware that inverse ETFs can go negative, and that there is counterparty risk involved.

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