Inverse ETF

Inverse ETF is a bearish derivative instrument that investors can also use for hedging. Compared with warrants or bear warrants, inverse ETFs have the following advantages and disadvantages:

Advantages: Inverse ETFs will not "die" suddenly, and there is no problem with time value. Even if you look in the wrong direction, you can still defend it. Inverse ETFs are the same as ordinary stocks and can be traded immediately, but without the effect of leverage, they are particularly suitable in volatile markets.

Disadvantages: The cost of inverse ETFs is higher than that of CBBCs and warrants because there is no leverage. If you want to short-sell HK$100,000 worth of Hang Seng Index constituent stocks, you have to invest HK$100,000 to buy inverse HSI ETFs. Moreover, inverse ETFs are not suitable for long-term holding, because in the long run, the stock market will rise due to the increasing global money supply. If the index is expected to rise in the long term, inverse ETFs have no long-term investment value.

How to use inverse ETFs for hedging strategies?

In addition to speculation, inverse ETFs have another value, and that is hedging. Sometimes, we hold a group of index constituent stocks with high dividend yields. On the one hand, we want to collect dividends, but we also expect the stock prices to fall. At this time, the best strategy is to buy inverse ETFs to hedge.

For example, at the beginning of 2020, local real estate stocks were affected by the epidemic and their stock prices fell, causing the Hang Seng Index to also fall. However, local real estate stocks have strong financial resources, their stock prices have fallen, and their dividends have not been reduced, resulting in a very high dividend rate. In this case, the best thing to do is to continue to hold local real estate stocks to collect dividends, and at the same time buy the Hang Seng Index inverse ETF to hedge. The result is that the inverse ETF made money due to the decline in the Hang Seng Index, and dividends from local property stocks continued to be collected.

In addition, the constituent stocks of the Hang Seng Index are also polarized in 2020, with new economy stocks doing well while old economy stocks performing poorly. Therefore, while using inverse ETFs to hedge the Hang Seng Index, you can not only hold local real estate stocks to earn dividends, but also hold new economy stocks to earn stock prices. Kill three birds with one stone.

What are the options for inverse ETFs in Hong Kong and the United States?

There are currently 14 inverse ETFs listed on the Hong Kong Stock Exchange in Hong Kong. Most of the relevant indexes are the Hang Seng Index. There are also inverse ETFs that track the Hang Seng China Enterprises or the US S&P 500 Index. Since the holdings of inverse ETFs are mainly derivatives, such as options, futures, swap contracts, etc., their expense ratios will be higher than those of ordinary ETFs. However, there are not many inverse ETF options in Hong Kong. Interested investors can choose US stock ETFs, and there are even 3x leveraged inverse ETFs.