An inverse ETF can be defined as an exchange traded fund (ETF) developed by utilizing different derivatives to profit from a decline in the value of an underlying benchmark.
Putting resources into inverse exchange traded funds is like holding different short positions, which include borrowing stocks and selling them with the desire for repurchasing them at a lower price.
An inverse exchange traded fund is also referred to as a "Short exchange traded fund" or "Bear exchange traded fund."
Numerous inverse exchange traded funds use daily futures contracts to create their profits.
A futures contract can be defined as a contract to purchase or sell an security or asset at a predefined time and price.
Futures contracts enable investors to make a wager on the direction of a stocks price.
Inverse exchange traded funds' use of derivatives—such as futures contracts—enables investors to make a wager that the market is going to fall.
In the event that the market falls, the inverse exchange traded fund ascends by approximately the same percentage minus commissions and fees from the brokerage firm.
Inverse exchange traded funds are not long term investments as the derivative contracts are purchased and sold day by day by the fund's manager.
Therefore, its absolutely impossible to ensure that the inverse exchange traded fund will match the long term performance of the stocks or index it is tracking.
The continuous trading often builds fund costs and some inverse exchange traded funds can carry cost ratios of 1% or more.