Contrarian investors seeking to capitalize on stock market declines can profit during a bear market using an inverse exchange-traded fund(ETF). A bear market is typically defined as a situation where securities prices fall 20% or more from recent highs amid widespread investor pessimism. The spread of COVID-19 and its effect on investor sentiment triggered a collapse in securities prices earlier this year. Inverse ETFs are designed to make money when the stocks or underlying indexes they target go down in price. These funds make use of financial derivatives, such as index swaps, in order to make bets that stock prices will decline. Unlike shorting a stock, though, investors in inverse ETFs can make money when markets fall without having to sell anything short.
Key Takeaways
- The 2020 bear market lasted from February 19 to March 23, and the S&P 500's total return was -33.8% from peak to trough.
- The inverse ETFs with the best performance during the 2020 bear market were RWM, DOG, and HDGE.
- To achieve their inverse exposure, the first two ETFs make use of various swap instruments, and the third ETF holds short positions in different stocks.
The inverse ETF universe is comprised of about 10 ETFs, excluding leveraged ETFs and ETFs with less than $50 million inassets under management (AUM).The last bear market took place from February 19, 2020 to March 23, 2020, during which the total return for the S&P 500 was -33.8%. The best inverse ETF during the 2020 bear market, based on its total return between the two dates above, was the ProShares Short Russell 2000 (RWM). We examine the three best inverse ETFs of the 2020 bear market below. All numbers in this story are as of March 3, 2021.
Inverse ETFs can be riskier investments than non-inverse ETFs, because they are only designed to achieve the inverse of their benchmark's one-day returns. You should not expect that they will do so on longer-term returns. For example, an inverse ETF may return 1% on a day when its benchmark falls -1%, but you shouldn't expect it to return 10% in a year when its benchmark falls -10%. For more details, see this SEC alert.
ProShares Short Russell2000 (RWM)
- Bear market return: 55.4%
- Performance over 1-Year: -30.95%
- Expense Ratio: 0.95%
- Annual Dividend Yield: 1.20%
- Average Trading Volume: 2,085,612
- Assets Under Management: $254.83 million
- Inception Date: January 23, 2007
- Issuer: ProShares
RWM seeks to provide a daily return, before fees and expenses, that is -1x the daily performance of the Russell 2000 Index, an index which tracks the performance of the small-cap segment of the U.S. equity market. The ETF makes use of both ETF and index swaps to achieve its inverse exposure. Since the -1x exposure is for a single day, investors holding the fund for longer than a day will be exposed to compounding effects, causing returns to deviate from the expected inverse exposure.
ProShares Short Dow30 (DOG)
- Bear market return: 47.3%
- Performance over 1-Year: -20.44%
- Expense Ratio: 0.95%
- Annual Dividend Yield: 1.96%
- Average Trading Volume: 907,272
- Assets Under Management: $314.36 million
- Inception Date: June 19, 2006
- Issuer: ProShares
DOG aims to provide a daily return, before fees and expenses, that is -1x the daily performance of the Dow Jones Industrial Average (DJIA). The Dow is an index that tracks 30 large, publicly-owned blue chip companies on the New York Stock Exchange (NYSE). The ETF provides inverse exposure to these 30 stocks through the use of various swap instruments. Since the inverse exposure is daily, investors holding the fund for longer periods of time should not expect -1x performance. The fund uses DJIA swaps to obtain its inverse exposure.
AdvisorShares Ranger Equity Bear ETF (HDGE)
- Bear market return: 47.3%
- Performance over 1-Year: -43.48%
- Expense Ratio: 3.36%
- Annual Dividend Yield: 0.27%
- 3-Month Average Daily Volume: 1,093,326
- Assets Under Management: $56.81 million
- Inception Date: January 26, 2011
- Issuer: AdvisorShares
HDGE seeks to achieve positive returns by shorting stocks listed on U.S. exchanges. The ETF uses a combination of quantitative and fundamental factors in order to build a portfolio of equities to short. Good candidates are stocks of firms with low earnings quality or aggressive accounting practices. However, shorting stocks is expensive, which results in high ETF fees. The fund's three biggest shorts are Canon Inc. (CAJ), a Japan-based manufacturer of copying machines, printers, cameras, and lithography equipment; Pros Holdings Inc. (PRO), a provider of business software services; and Snap-On Inc. (SNA), a tool and equipment manufacturer.
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FAQs
The inverse ETFs with the best performance during the 2020 bear market were RWM, DOG, and HDGE. To achieve their inverse exposure, the first two ETFs make use of various swap instruments, and the third ETF holds short positions in different stocks.
What are the best bear market ETFs? ›
7 best-performing inverse ETFs of 2024
| Ticker | ETF Name | 1 month return |
|---|
| DRV | Direxion Daily Real Estate Bear 3X Shares | 29.77% |
| FLYD | MicroSectors Travel -3x Inverse Leveraged ETN | 26.87% |
| TZA | Direxion Daily Small Cap Bear 3X Shares | 23.76% |
| SRTY | ProShares UltraPro Short Russell2000 | 23.44% |
3 more rows6 days ago
ProShares UltraShort Russell2000 (TWM)
The ProShares UltraSort Russell2000 aims to deliver the inverse daily returns of the performance of the Russell 2000 market index.
What investments do well in a bear market? ›
Buy dividend stocks
Another way to hedge against bear markets is to invest in stocks that pay dividends over those that do not. Dividend-paying stocks usually outperform non-dividend-paying stocks — typically with less risk, according to 2022 research from Johnson Asset Management.
What is the 2X inverse S&P 500 ETF? ›
The S&P 500® 2X Inverse Daily Index provides two times the inverse performance of the S&P 500, widely regarded as the best single gauge of the U.S. equities market. This index was designed to assist investors who are seeking a short position on U.S. equities.
What is the largest inverse ETF? ›
The largest Inverse ETF is the ProShares UltraPro Short QQQ SQQQ with $2.98B in assets. In the last trailing year, the best-performing Inverse ETF was SVIX at 123.81%. The most recent ETF launched in the Inverse space was the ProShares UltraShort Bitcoin ETF - SC - United States SBIT on 04/02/24.
Are ETFs safe in a bear market? ›
Investors looking to weather a recession can use exchange-traded funds (ETFs) as one way to reduce risk through diversification. ETFs that specialize in consumer staples and non-cyclicals outperformed the broader market during the Great Recession and are likely to persevere in future downturns.
What ETF mirrors the Russell 2000? ›
ETF Results: 10 ETFs
| Ticker | Fund Name | 3-Mo TR |
|---|
| IWM | iShares Russell 2000 ETF | 0.53% |
| VTWO | Vanguard Russell 2000 ETF | 0.58% |
| TNA | Direxion Daily Small Cap Bull 3X Shares | -4.70% |
| URTY | ProShares UltraPro Russell2000 | -4.61% |
6 more rowsHistorically, SQQQ decays around 7-8% per month, though this would likely be around 4-5% per month during a flat market such as that experienced so far this year.
How long should you hold an inverse ETF? ›
Inverse ETFs have a one-day holding period. If an investor wants to hold the inverse ETF for longer than one day, the inverse ETF must undergo an almost daily operation called rebalancing. Inverse ETFs can be used to hedge a portfolio against market declines.
Take a short-selling position. Going short in bearish times is one of the most common bear market strategies among traders. As a trader, you'll short-sell when you expect a market's price will fall. If you predict this correctly and the market you're trading on does decline in value, you'll make a profit.
Where should I put my money in a bear market? ›
Find strategic opportunities. In a market downturn, defensive stocks — consumer staples, healthcare and utilities, as well as companies with higher-quality businesses and balance sheets — potentially can offer opportunities.
What not to do in a bear market? ›
Selling off all your stocks after seeing red in your portfolio during a bear market is the last thing you want to do. Volatility is scary, especially if you are risk averse, but running with the volatility wave is key and beneficial to the success of your long-term portfolio.
Why don't inverse ETFs work? ›
Since they rebalance daily, inverse ETFs often diverge from the actual inverse performance over longer periods. They also compound losses in volatile, upward-trending markets. Indeed, inverse ETFs tend to decline in value over time regardless of whether the underlying market is rising or falling.
How much can you lose on an inverse ETF? ›
Inverse ETFs are designed for speculative traders and investors seeking tactical day trades against their respective underlying indexes. For example, an inverse ETF that tracks the inverse performance of the Standard & Poor's 500 Index would reflect a loss of 1% for every 1% gain of the index.
What is a 3X inverse ETF? ›
Leveraged 3X Inverse/Short ETFs seek to provide three times the opposite return of an index for a single day. These funds can be invested in stocks, various market sectors, bonds or futures contracts.
What is a 3X bear ETF? ›
These leveraged ETFs seek a return that are 300% or -300% of the return of their benchmark index for a single day. The funds should not be expected to provide three times or negative three times the return of the benchmark's cumulative return for periods greater than a day.
Is Jepi good for bear market? ›
Many investors are interested in JEPI because this ETF offers high yields and low volatility, which can be especially attractive features to risk-averse investors in a low-yield environment coinciding with a bear market.
Does Vanguard have a bear market fund? ›
However, in a bear market scenario, the Vanguard Health Index Fund should outperform this benchmark index due to its ties to medical services and goods. After all, the fund handily outperformed the S&P 500 during the 2022 bear market by 12.5 percentage points.
Are Covered Call ETFs good in a bear market? ›
Covered calls can also produce respectable returns right after a market crash when volatility levels usually remain elevated. The fact that covered-call strategies typically have lower volatility and similar returns to the S&P 500 means they often have better risk-adjusted returns.
