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Canadian Inverse ETFs, explained

What is an inverse ETF?

An inverse exchange-traded fund (ETF) is a type of ETF that is designed to provide investors with returns that are inversely correlated to the performance of an underlying index, sector, or asset class. In simpler terms, an inverse ETF aims to deliver the opposite return of its benchmark.

Inverse ETFs achieve this inverse performance by using various financial instruments and strategies, such as short selling, futures contracts, options, or swaps. These funds are typically managed actively to maintain the desired inverse exposure on a daily basis.

Here’s how an inverse ETF works:

  1. When the underlying index or benchmark decreases in value, the inverse ETF seeks to increase in value by approximately the same percentage. For example, if the underlying index goes down by 1%, the inverse ETF attempts to go up by 1%.
  2. Conversely, if the underlying index increases in value, the inverse ETF aims to decrease in value by approximately the same percentage. For instance, if the underlying index rises by 1%, the inverse ETF would strive to decline by 1%.

Inverse ETFs are primarily used by investors for short-term trading strategies, hedging positions, or speculating on downward market movements. It’s important to note that inverse ETFs are generally designed to provide inverse performance on a daily basis, meaning their correlation may not be precise over longer time periods due to compounding effects and other factors.

Investors considering inverse ETFs should carefully evaluate the investment objectives, risks, and costs associated with these funds. They should also be aware that inverse ETFs are generally intended for experienced investors who understand the complexities of these products and the potential risks involved. Consulting with a financial advisor can help determine if inverse ETFs are suitable for an individual’s investment goals and risk tolerance.

Canadian Inverse ETF examples

These ETFs are designed to provide investors with inverse exposure to specific Canadian indexes or sectors. By utilizing various strategies, such as shorting or derivatives, these ETFs aim to generate returns that are negatively correlated to the performance of their underlying benchmarks.

Some examples of inverse ETFs in Canada include:

  1. Horizons BetaPro S&P/TSX 60™ Inverse ETF (HIX): This ETF aims to provide daily inverse performance to the S&P/TSX 60 Index, which represents 60 of the largest Canadian companies.
  2. Horizons BetaPro S&P/TSX Capped Financials™ Inverse ETF (HIF): This ETF seeks to provide daily inverse performance to the S&P/TSX Capped Financials Index, which includes Canadian financial sector stocks.
  3. Horizons BetaPro S&P 500™ Inverse ETF (HIU): This ETF is designed to provide daily inverse performance to the S&P 500 Index, which represents the performance of large-cap U.S. stocks.

These examples are not exhaustive, and there may be other inverse ETFs available in Canada. It’s essential to carefully research and understand the objectives, strategies, and risks associated with any specific inverse ETF before considering an investment. Additionally, consulting with a financial advisor can provide personalized guidance based on your investment goals and risk tolerance.

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