Newsletter 71: 🧭 Turning the Market Upside Down: My Dive Into Inverse Leveraged ETFs

Last week, I shared how I started exploring leveraged ETFs to amplify my returns when my portfolio was just $5,000. With limited capital, those 2x and 3x SPY ETFs gave me access to the full power of the market’s daily moves.

But what happens when the market turns against you?

That’s when I discovered inverse leveraged ETFs — funds designed to profit when the market drops. Instead of just sitting out during downturns, these ETFs give traders a tool to short the market without actually borrowing or short-selling.

It’s like holding an umbrella when everyone else gets caught in the rain.

🧩 What Are Inverse Leveraged ETFs?

Inverse leveraged ETFs are engineered to deliver the opposite of the daily returns of an index — multiplied by a certain factor.

For example:

• A -1x inverse ETF aims to return the opposite of the S&P 500’s daily move.
• A -2x or -3x inverse ETF aims to return two or three times the opposite of that daily move.

If the S&P 500 falls 1%, a -3x ETF should rise roughly 3%. These funds achieve that by using derivatives like futures, swaps, and options, rebalancing daily to maintain their target leverage ratio.

If you would like to learn more about accelerating your investment, find out more from Eric Seto.

⚙️ Top Inverse S&P 500 ETFs

Here are the most traded inverse leveraged ETFs that move opposite the S&P 500 (SPY):

These ETFs are especially popular during bear markets or corrections, allowing traders to take short-term bearish positions without margin accounts or options.

📈 When Do Traders Use Inverse ETFs?

Inverse leveraged ETFs can serve different short-term goals:

• Hedging: Protecting an existing stock portfolio when expecting short-term pullbacks.
• Speculating: Taking a quick, leveraged bearish position when market sentiment weakens.
• Trading volatility: Capturing gains during choppy markets or news-driven dips.

However, like their leveraged counterparts, these funds are reset daily — meaning long-term returns can deviate sharply from expectations.

⚠️ The Dark Side: Volatility Decay and Timing Risk

Here’s the catch: inverse leveraged ETFs suffer from the same compounding and volatility decay as leveraged ETFs — only in reverse.

If the market whipsaws up and down, these ETFs can lose value even if the index ends flat.

For example:
If the S&P 500 rises 5% one day and falls 5% the next, the index ends down slightly — but a -3x ETF may lose more than 15% due to compounding losses on a reduced base.

In other words, inverse ETFs reward timing accuracy. The longer you hold them, the greater the odds that compounding erodes returns.

💰 Fees and Liquidity Check

Inverse leveraged ETFs carry higher expense ratios (around 0.9–1.0%) versus traditional SPY funds (0.09%). They also tend to be more volatile and less liquid, though popular tickers like SPXS and SDS trade millions of shares daily, keeping bid-ask spreads tight.

These are tactical tools — not long-term investments. Most traders use them for short bursts, sometimes just hours or days.

🧠 Key Takeaway

Inverse leveraged ETFs can act like your portfolio’s insurance policy — giving you a way to profit from pain during market downturns.

But just like insurance, there’s a cost. Misuse or overexposure can hurt more than it helps.

If you missed last week’s deep dive into SPY Leveraged ETFs, you can read it here (or check the chart showing 2x and 3x SPY options).

If you like my newsletter, try checking out these high-performing newsletters too.

Stay sharp, stay spiky — be the hedgehog with a strategy
— Mindy
Founder, Hedgehog Huddle