There are two general sayings in the investment world:
- Markets tend to go up over a long-term horizon
- Trying to time markets is very difficult
Inverse ETFs go against both of these sayings, yet there are always more being launched each year.
Whether you are looking to swing trade or protect yourself from market volatility, we’ll cover the best inverse ETFs in Canada, and when to use them.
An important thing to keep in mind is that inverse ETFs are purposely designed to be used as short-term investment vehicles.
Most markets do rise over a long period of time, so holding an inverse ETF over a very long period of time will likely cause you to lose money.
Inverse ETFs: A Warning
All of the features of the below inverse ETF make them appropriate only for seasoned investors.
As some of the ETFs are very small in assets, they run the risk of being closed at any time.
The below inverse ETFs also come with very high MERs – even higher than most mutual funds.
Make sure that you are well informed and have a very high-risk tolerance before including inverse ETFs in your portfolio.
This video does a great job outlining potential risks:
Best Inverse ETFs in Canada
1. Horizons BetaPro S&P 500 Daily Inverse ETF
The HIU ETF looks to provide the inverse performance of the S&P 500 index. HIU looks to hedge away the impact of currency changes between the US dollar and Canadian dollar.
If you are looking to profit from a drop in the value of large-cap US stocks in the immediate term, this ETF is a good choice.
For example, 2022 had a terrible start to the year for most investors. The HIU would have been a great investment over the course of the current market drawdown.
This inverse ETF aims to hedge away currency changes between the US and Canadian dollars.
2. Horizons BetaPro Marijuana Companies Inverse ETF
HMJI looks to return the inverse of the daily performance of the North American MOC Marijuana Index.
This is a good option if you feel that cannabis as a sector will fall in the immediate term without having to short any individual companies.
As cannabis companies have been under a lot of selling pressure over the past year, HMJI has had very high returns.
3. Horizons BetaPro S&P/TSX 60 Daily Inverse ETF
The HIX ETF aims to provide investors with the inverse daily performance of the S&P/TSX 60 index, or the 60 large-cap Canadian companies.
The Canadian market in general is much more different than the US market – it is much more concentrated in several sectors.
The Canadian market is concentrated in sectors such as financials, materials, industrials, and energy. This concentration has caused the S&P/TSX 60 to outperform the S&P 500 throughout the start of 2022.
4. Horizons BetaPro Crude Oil Inverse Leveraged Daily Bear ETF
HOD seeks to return up to two times the inverse return of the Horizons Crude Oil Rolling Futures Index. Currency fluctuations between the US dollar and Canadian dollar are hedged as best as possible.
The ETF aims to be leveraged as close as possible to 200% of the inverse return, but the portfolio manager has the discretion to lower the leverage if needed.
Crude oil has had a terrific run at the beginning of 2022, due to inflationary pressures. As a result, the HOD ETF was down a significant amount. If you believe that crude oil futures will fall in the very short term, this inverse ETF is a great choice.
5. Horizons BetaPro Nasdaq-100 -2x Daily Bear ETF
As another leveraged inverse ETF on the list, HQD aims to return two times the inverse performance of the Nasdaq-100 index. Again, currency fluctuations between the US dollar and Canadian dollar will be hedged to the best ability of the manager.
The Nasdaq-100 index has come under a lot of pressure since the beginning of 2022. With a large rotation out of technology and growth stocks taking place since the beginning of the year, the index was down during the first half of 2022.
The inverse ETF is a good option to take advantage of further short-term drops in the index.
6. Horizons BetaPro Inverse Bitcoin ETF
BITI aims to provide investors with 100% of the inverse daily performance of an index tracking Bitcoin futures. This objective is not designed to be sustainable over a longer period of time.
Keep in mind that the price of a Bitcoin future is not exactly the same as the price of Bitcoin today.
The debate on how useful Bitcoin is as an asset (and how overvalued it may be) will likely continue in the future. If you are looking for opportunities to profit from a fall in Bitcoin prices or Bitcoin futures, BITI is your best bet in Canada.
7. Horizons BetaPro Gold Bullion -2x Daily Bear ETF
HBD tracks a gold futures index, and looks to return twice the inverse performance of a gold futures index. This ETF is riskier than most on this list, because it incorporates leverage as well.
The market for gold and other precious metals typically moves in cycles. If you are expecting a sharp drop in the price of gold or gold futures in the very short term, HBD could be a profitable way to trade it.
The ETF looks to hedge away any currency fluctuations between Canadian dollars and US dollars.
Are Inverse ETFs worth it?
In a perfect world where we knew which way the market would move each day, you would make the most money by buying and shorting the market on different days.
A simplified example:
Day 1: Market A rises 1% and you are long – you earn a profit of 1%.
Day 2: Market A drops 0.5% and you are short – you earn a profit of 0.5%.
How useful inverse ETFs are comes down to your ability to predict how the market will move. If you have the resources and abilities to track specific sectors or indices, inverse ETFs may be invaluable by buying them right before the market drops.
If this is your first time purchasing any investment, you’re likely better off avoiding inverse ETFs for now.
I personally don’t invest in inverse ETFs, due to their high fees and it also feels a bit like gambling. Inverse ETFs also go against a lot of my personal investment principles (such as believing the market goes up in the long-term, and invest as cheaply as possible).
Inverse Exposure in Registered Accounts
Due to the nature of registered accounts in Canada, short-selling a stock outright is not allowed. If you are looking to profit from specific sectors or indexes falling, your options are limited to one of the below:
Option 1: Buying an Inverse ETF
Since Inverse ETFs are eligible for registered accounts, you are able to profit from the drop in value of a particular investment.
In addition to the precautions we listed earlier in the article, keep in mind that most registered accounts are for the purpose of funding your retirement.
Short-term trading in these inverse ETFs, especially if they are leveraged, can cause a lot of volatility in the portfolio.
Remember that once the contribution room within a registered account is lost, it can’t be regained.
Option 2: Buying Put Options
Put options are another alternative to inverse ETFs, to profit from the drop in price of a particular investment.
Keep in mind that options are highly leveraged, and be careful with excessive trading within registered accounts.
Inverse ETF Size
The seven inverse ETFs listed above are fairly small compared to most regular ETFs. Because of their small size, there may be a wide bid-ask spread, and trading can be highly illiquid.
Make sure to always purchase small AUM ETFs by using limit orders instead of market orders.
This is to avoid any unpleasant surprises when you check the average price for the ETF units you have purchased.
Holding Inverse ETFs for the Long Term
As we mentioned before, inverse ETFs are ideal only for immediate or short-term trading. Holding these ETFs in your portfolio for several years can lead to significant losses, due to how the inverse ETFs are structured.
Below are the calendar year returns for the HQD ETF:
|BetaPro NASDAQ-100® -2x Daily Bear ETF||-34.86||-25.50||-19.52||-45.04||-11.13||-50.27||-69.43||-45.17|
The high MERs that come with inverse ETFs will also reduce long-term returns significantly.
How To Buy Inverse ETFs In Canada
The cheapest way to buy ETFs is from discount brokers. My top choices in Canada are:
- 105 commission-free ETFs to buy and sell
- Excellent customer service
- Top-notch market research tools
- Easy-to-use and stable platform
- Stock and ETF buys and sells have $0 trading fees
- Desktop and mobile trading
- Reputable fintech company
- Fractional shares available
To learn more, check out my full breakdown of the best trading platforms in Canada.
Inverse ETFs are much more of a niche investment than their regular ETF counterparts. When a specific asset drops in value, inverse ETFs can provide a great return in the immediate or short term.
These inverse ETFs should generally not make up the bulk of your investment portfolio.
Remember to apply portfolio construction fundamentals for long-term investment growth and success.