Stock Investing Strategies

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Inverse ETFs

Bear market ETFs are one of the lates investments available. They have become pretty popular since they where first created and new ETFs have been poping up all the time. But are they really a great investment opportunity or should the average investor stay away from them?

First if you where woundering what are ETFs they basically let you invest your money into a whole sector of the market. With an inverse ETF an investor can actually benefit as a specific market goes down. For example the SH goes up as the SPY goes down. These ETFs can be used very effectively when the stock goes down.

They are just as easy to invest into as stocks; all you need is a broker. But are they really worth it? There are a few big problems with inverse ETFs. For starters they do not follow a 1 to 1 correlation with the instrument they are tracking. So if the SPY goes down 2% that does not mean that the SH will go up 2%, instead it relies on a lot of complicated math which may even lead to a few days where the inverse ETF actually moves in the same direction as the underlying market it is shorting.

The second major problem with investing into these is that it goes against the market. The stock market has had a positive average annual return over the long term in the past. By buying a short ETF you are betting against the odds.

That does not mean that they are useless, if you are a trader and enjoy making the 1 to 2 day moves on a stock this is a perfect security for you. If you are comfortable trading the short movements it may be something you would like to get into, otherwise it is a much better decision to stay away from them.

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