Inverse and Leveraged ETFs: Considering the Alternatives

Barnhorst, Bradley C.; Cocozza, Christopher R.
January 2011
Journal of Financial Planning;Jan2011, Vol. 24 Issue 1, p44
Academic Journal
• Inverse and leveraged exchange-traded funds (ETFs) have been developed to allow market participants to engage in short-term hedging or speculation across any array of market indexes and sectors. • Though some long-term investors have used these funds to speculate or hedge they are less than ideal for many reasons; chief among them the daily rebalancing that causes a divergence between the benchmark index and the typically expected long-term returns of the ETF • ETFs with different rebalancing periods are coming and might be more effective for certain investors, but other alternatives already exist. • Exchange-traded notes (ETNs) have been developed for the S&P 500 Total Return Index, and an investor who purchases the notes and holds them in any period up to their five-year lifespan should have returns that are closer to the expected benchmark. • Futures contracts can provide the desired exposure and are available for many indexes and sectors, but have some of their own quirks that must be addressed to be effective for particular clients' needs. • Options strategies provide even more customization for a desired risk profile. • Tax implications are a consideration for all of these strategies, and tax-deferred accounts require particular attention.


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