A type of ETF (exchange-traded fund) that is designed to benefit from any declines in the underlying index or market performance (benchmark). The fund is composed of certain asset classes such as derivatives to profit from any adverse movement in the underlying index/ benchmark. An inverse fund aims to produce returns in opposite proportions of a market index or certain asset class by having a market exposure linked to derivative contracts such as swaps and futures.
The performance of an inverse ETF is the mirror-image opposite of the target index. As the index experiences daily changes in its value, the investments in an ETF will also undergo daily fluctuations in value. Therefore, the fund may need to resort to borrowing of large amounts to account for the effect of such fluctuations.
Inverse ETFs can be classified as per performance multiples (e.g., 2x, 3x).
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