Exchange-traded funds (ETFs) are baskets of stocks or other investments that is similar to a mutual fund, but can be traded throughout the day like a securit. Inverse ETFs have values inversely related to other indexes. For example, an inverse ETF tied to the NASDAQ index may rise 1 percent in value whenever NASDAQ falls 1 percent. The opposite is also true: inverse ETFs fall in value when their corresponding indexes rise. While precisely calculating a hedge's result is as impossible as predicting the market, certain guidelines ensure that your purchase becomes a hedge rather than an investment.
1. Choose an ETF with a trading value that corresponds exactly to the index. Some ETFs promise returns higher than the index's loss, and these are intended for profits instead of hedging.
2. Investigate the ETF's trading volume: ETFs that trade under 300,000 shares daily might not fluctuate enough to hedge your investment effectively.
3. Watch at the beginning of daily trading for signs that your index is about to fall. Most ETFs begin trading a few minutes after an index opens on the market, and traders calculate hedge investments in ETFs in the interim.
4. Keep money in your inverse ETF for a matter of hours or days to create a true hedge. Hedges are short-term precautions, and keeping your money in longer than necessary turns a hedge into an investment.
- Inverse ETFs reset every day, which means they have daily objectives rather than one continuous objective. Daily resets cause significant fluctuations in value that may not correspond with the previous day's results.
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