Why I avoid these ETFs
Welcome to my column, Young & Invested, where I discuss personal finance and investing for Gen Z and Millennials.
This column aims to be a resource for young investors navigating an ever changing financial, political and social landscape as they try to build wealth. Tune in every Thursday for the latest edition.
Edition 49
There’s never been a harder time to be an investor.
And before the chorus of platforms, apps and fintech founders get upset, let me explain. I do think it has never been easier to invest. A few taps on my phone and I can own half the ASX before my 10am soy latte goes cold. But accessibility doesn’t guarantee an easier journey.
In the past few years, we’ve been blasted with nonstop noise about valuations, AI bubbles and recessions. This has seeped into every corner of the internet. Even my sacred 20 minutes of morning TikTok dissociation now gets hijacked by doomsayers and Trump’s latest antics. Drowning this out is a real Olympic sport.
There is definitely an encroaching sense that markets are teetering on the edge of something big. But as someone who usually finds great joy in pessimism, even I struggle to buy into the narrative of market demise.
Nevertheless, many investors now face a dilemma. If you’re in the camp that believe broad markets are set to trend down, it’s only natural to be looking at other avenues to generate strong returns. One of these are inverse ETFs. Despite continued poor performance, investors continued to pour support into the products which intend to capitalise on broad market falls.
Are these ETFs the answer to our market woes? I’m not convinced. And like everything in investing, they come with their own quirks.
What are inverse ETFs?
Inverse ETFs (sometimes referred to as ‘short’ or ‘bear’ funds) are designed to move in the opposite direction of the index or benchmark they track. If the market dips, these products aim to go up. Some versions take things a step further by adding leverage, meaning they try to deliver a multiple of the inverse return. I’ve previously explored the mechanics of leveraged ETFs here.
Importantly, such funds won’t return the perfect opposite return of the underlying index over any period of time. You won’t get a neat ‘ASX 200 falls 5% and inverse ETF rises 5%’. Beyond the risk of betting against the market, this presents an additional risk when held long-term. Due to this, inverse ETFs are generally designed for single day holding periods. While movements during such short time horizons can be used for hedging most individuals are likely using them for speculation.
What’s the appeal?
The investor tendency to speculate remains alive and well. In the US, money parked in ETFs classified as trading tools (mostly providing leveraged or inverse exposure) has almost quadrupled over the past six years. Over the same period, broad equity markets performed resoundingly well, but several major events have resulted in periods of heightened volatility. This has created a perceived opportunity for both long-term investors and speculators looking to make a quick turn.
There are a couple reasons behind the inherent appeal of such products. When markets look shaky, we often have an overwhelming tendency to react and reassert control. Instead of sitting on our hands, an inverse ETF may soothe this feeling of vulnerability or perception of being ‘over-exposed’ in case markets take a turn for the worse.
This ties into the idea of hedging a portfolio which involves including negatively correlated assets to reduce overall risk (as defined by volatility). The logic is that if most of your holdings tend to move in the same direction, adding something in opposition would soften a hypothetical blow.
Another use case for such ETFs is when investors have shorter time horizons. Long-term investors have the liberty to ignore volatility for decades, but that luxury fades for those approaching retirement or their investment goals. The closer you are to your intended withdrawal date, the larger the need to offset short-term downside risk. Inverse ETFs sometimes get slotted into this role as a temporary hedge when stability matters more than growth.
For the more sophisticated investor, the ETF wrapper offers a more straightforward way to express a bearish sentiment, rather than navigating the complications of futures, CFDs and short selling.
What I don’t like
From someone who used to treat my brokerage account like Sportsbet, these ETFs are on my avoid list. I fail to see the utility of inverse ETFs as a long-term buy and hold investor. They appear as nothing more than a directional, speculative bet on market movements (which we know are random over the short-term). I almost think it’d be simpler to just head to the casino and bet it all on red. For one, it’d save the administrative headache. Betting against the rise of broad equity markets hasn’t generally panned out so well for most.
Secondly, as I briefly touched on above, hedging is not a priority for long-term investors. Over the long run equities have risen substantially, so holding an ETF that is negatively correlated to the market isn’t something most growth focused investors would find ideal. Especially ones that charge high fees and erode the longer you hold it.
Costs are also a significant pain point. It’s well established that fees are a reliable predictor of the future success of a fund. Without singling out any specific players, inverse ETFs naturally carry higher costs compared to your vanilla broad market index fund. This is often due to the active management required when using derivatives to implement the opposite effect it aims for.
Lastly, neither I, nor Warren Buffet, nor any AI bot can determine short-term market movements with accuracy and consistency. However, inverse ETFs demand precision timing from investors, not just a general sense that markets might fall ‘soon’. Even if your big-picture call is correct, the path the market takes to get there can completely derail the outcome. Below is a hypothetical example of how an inverse fund may not perform to expectations, despite the underlying index losing value.
Source: Author visualisation. Index vs Inverse ETF performance in hypothetical high volatility scenario.
The timing issue isn’t a simple buy low sell high. It’s more like buy right before the fall, sell right before the rebound and hope the market moves relatively neatly(which it almost never does).
Is there an alternative?
Any move to reposition your portfolio based on a short-term market view e.g. is by definition, tactical asset allocation (TAA). A simple example would be reducing exposure to equities if you have conviction that a crash is impending. This is a deviation from long-term strategic allocation, and it’s intended to manage risk or take advantage of perceived opportunities.
Although there’s widely held evidence that even the pros aren’t great at achieving better outcomes through TAA, you might still feel compelled. It’s important to understand that any form of tactical allocation involves market timing and by extension, confidence in your ability to predict short term market movements with accuracy and consistency.
I think there are far more resilient ways to protect capital than reaching for an inverse ETF to hedge your exposure. Our long standing view remains that disciplined, long-term investing outperforms attempts to time the market, so this is not an endorsement of tactical shifts per say.
The most straightforward alternative in this case is to simply raise your cash levels. The benefit is that cash doesn’t ‘fall’ when markets do and continues to earn a reasonably predictable return determined by the product you use. It’s also arguably the lowest effort way to reduce risk without the structural quirks and timing demands that make inverse ETFs so unforgiving over longer periods.
On the other hand, unlike an inverse ETF, cash won’t reward you if the market falls. But the odds of correctly anticipating this are not in our favour. Since 1900, the ASX has delivered positive real returns 72% of the time. So there’s a good chance you’re wrong and the market goes up, but in this case, your cash won’t work against you in the way that inverse ETFs do.Instead of dragging on performance when markets rise, cash just lags the upside you could have gotten while still delivering a positive return. You’ll certainly miss some potential growth, but you won’t suffer the compounding losses. Simply, the penalty for being wrong is far smaller.
Source: Owen Analytics. 2026.
It’s important to remember that making the tactical allocation to retreat to cash might feel psychologically safer, but it is not a long-term wealth building strategy. You cannot simply save your way to wealth. That being said, over shorter periods I believe it presents a better alternative to an inverse ETF.
Concluding thoughts
Do I think it’s wise for the average retail investor to attempt shorting the market through an inverse ETF? Not particularly. Inverse ETFs are specialised, complex products dressed in the friendly ETF wrapper we’ve all grown comfortable with. That doesn’t change the fact that the underlying mechanism has historically been used for short‑term trading, where luck and volatility determines outcomes far more than long‑term fundamentals.
More interesting, investors should understand the broader picture here of growing unease and a desire to control outcomes to provide certainty in a market that rarely offers it. In the end, I think the best defence we have isn’t a complex product or tactical allocation, it’s creating an investing strategy with defined parameters that we can actually stick to. If the current market chatter makes you uneasy, it’s probably a good time to review your strategy and whether it still aligns with your risk tolerance.
