There is growing interest in inverse ETFs in India. These special investments aim to make profits when the market drops. This shows that more investors are now exploring ways to earn even during falling markets. These funds are no longer solely for professional use; they are gradually becoming instruments for smart everyday traders for hedging and speculation. What exactly are inverse ETFs, and why are they gaining acceptance?
Let’s understand inverse ETF, its meaning, features, advantages, and when to use it for your financial needs.
What is an Inverse ETF?
An inverse ETF is an exchange-traded fund that aims to provide a contrary return to a particular index or asset. Assume, for example, that the index goes down by 1%; inversely, this ETF expects an increase of 1%.
These funds use financial instruments like derivatives, futures, and swaps to achieve their objectives. It should not be considered like normal ETFs because of risky compounding, which occurs after exposure to the stock for an extended period, which is more than a trading day.
Their key features are:
- Tracks the inverse performance of a market index (e.g. Nifty 50).
- Trades on stock exchanges are like regular stock or ETFs.
- Suitable for short-term strategies, especially during market downturns.
- Often used for hedging an existing position or making speculative trades.
Types of Inverse ETFs
Understanding the different types can help you choose the right strategy:
| Type | Objective |
| Index-based | When a major market index (like Nifty or Sensex) goes down, these go up. They’re useful if you think the overall market will fall. |
| Sector-specific | These move opposite to a specific sector, like banking, IT, or energy. They are helpful when you expect only a certain industry to drop. |
| Leveraged Inverse ETFs | These give 2x or 3x the opposite return of a market or sector. For example, if the market drops 1%, a -2x ETF may rise by 2%. These are high-risk and meant for short-term use only. |
Inverse ETFs vs. Short Selling
Both strategies aim to profit from falling markets but work very differently.
| Feature | Inverse ETF | Short Selling |
| Execution | Buy a stock via your trading account | Requires borrowing shares to sell first |
| Risk of Unlimited Loss | Limited to the amount invested | Losses can be unlimited if the price rises |
| Maintenance | No margin requirements | Requires margin and active monitoring |
| Ease of Access | Simple via Dhan or similar platforms | More complex and regulated |
Learn more about shorting strategies and derivatives through the Dhan MadeForTrade community—an open platform where traders share insights and experiences.
Advantages of Inverse ETFs
These ETFs offer several practical benefits for both beginners and seasoned investors:
- No Need for Margin: Inverse ETFs let you earn from falling markets without borrowing money or opening a margin account.
- Diversification in Bear Markets: These ETFs cushion when markets fall. Adding them to your portfolio can reduce losses during market downturns.
- Low Cost & Easy Access: This can be bought through platforms like Dhan, which offers zero brokerage for ETFs and lightning-fast execution.
- Tactical Exposure: Inverse ETFs are good for making short-term moves. If you believe a certain sector or index will drop, you can invest in an inverse ETF to benefit from that fall.
- Tax Efficiency: Like normal equity investments, gains from inverse ETFs are taxed as capital gains. This keeps taxation simple and clear for investors.
When to Use Inverse ETFs?
Inverse ETFs shine in the following situations:
- Market Correction Prediction: If you foresee a short-term drop in an index or sector.
- Hedging Your Portfolio: You hold long-term stocks but want temporary protection.
- Bearish on a Specific Sector: Use a sector-based inverse ETF to take a precise bet.
Where to Buy Inverse ETFs?
You can buy them just like stocks through popular brokers. Here’s how it looks on Dhan’s app:
- Search for the inverse ETF (e.g. “NIFTY 50 PR 1X INVERSE”).
- Check real-time chart, stats, and expense ratio
- Place a buy order with your preferred amount
- Monitor or exit based on your short-term view
Inverse ETFs: A Tool, Not a Strategy
Inverse ETFs are very smart financial tools, but are not investment strategies in isolation. These are not ideal for long-term investors or those with a low-risk appetite. Due to daily reset and compounding effects, returns can vary widely.
Use them to hedge or gain short-term market moves and avoid considering them SIPs or long-term holdings. Always be informed, use stop-losses, and follow market events.
With Dhan, you can have zero brokerage on ETFs, in-built charting tools, and a thriving trader community to learn from for an easy and quick way to trade these ETFs.
