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| Shorting and Leverage |
Essentials of Leveraged &
Inverse Investing PDF |
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Sometimes called “bear funds” or “short funds,” inverse funds and ETFs are designed to provide investment results that move in the opposite direction of the daily price movement of the index to which they are benchmarked (for example, the S&P 500® Index).
Though inverse investment products can help you make the best of a down market, they are not suitable for all investors. The value of an inverse investment may increase on a daily basis by the amount of any decrease in the index, but the converse is also true—the value of the investment will also tend to decrease on a daily basis by the amount of any increase in the index.
Inverse Funds Move in the Opposite Direction of the Index
Using Inverse Investments
Inverse investments may also complement an existing portfolio. For example, when used as a complement to other mutual funds or ETFs that do not employ shorting, inverse investments may reduce downside risk and volatility in a portfolio.
Utilizing inverse funds or ETFs is potentially less expensive than shorting individual stocks and you risk only the amount invested. And unlike other shorting vehicles, inverse funds and ETFs can be used in qualified accounts. As with any investment, however, investors should reevaluate their portfolio circumstances regularly to determine if inverse strategies should be a part of their total investment plan.
| Potential Advantages
of Inverse Funds |
Potential Disadvantages
of Inverse Funds |
• Hedge portfolio allocations during market downturns
• Reduce downside risk without
enduring the tax consequence
of selling
• Opportunity for inverse exposure to major indices in qualified plans* (IRA, Roth IRA, SAP)
• Less expensive alternative to
shorting stocks
• Risk only the amount invested
• Take advantage of short-term
tactical and long-term strategic
opportunities |
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• When the index or market moves upward, the value of a fund will
tend to decrease by the amount
of any increase
• Increased volatility due to the use of derivatives such as swaps
• Increased risk due to short sales
• May not be suitable for all investors |
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This information does not constitute tax advice. Please consult your tax advisor and/or state and local tax
offices for more complete information.
* Subject to discretion of plan administrator.
Inverse funds and leveraged funds may not be suitable for all investors. Investing in short/inverse funds involves certain risks, which may include increased volatility due to the funds' possible use of short sales of securities and derivatives such as options and futures. The funds are subject to active trading risks that may increase volatility and impact the funds' ability to achieve their investment objectives. The use of leverage by a mutual fund increases the risk to the fund. The more a mutual fund invests in leveraged instruments, the more the leverage will magnify any gains or losses on those investments.
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