Posted byBlain ReinkensmeyerLast updated on May 25th, 2019 Published Jan 19th, 2018

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After some research I thought recently that I may want to place some bearish bets in myonline broker account.Inverse ETFs(exchange traded funds) are a good way to do that so I wanted to make sure I had a list of short ETFs at my fingertips when and if the need ever arose. So the following etf list is just for my possible future reference. Please let me know if Ive missed any ETFs (you can also find a list ofLong ETFs (Bullish ETFs)):

To compare online brokers for trading ETFs, read ouronline broker guideand use comparison tool. I recommendFidelitywhich has the best ETF research tools (ETF screeners, charting, third-party reports, etc) and overall experience for ETFs.

One of the Fast Money guys mentioned the UltraShort Oil Gas ProShares ETF (DUG) on a recent show. He questioned how that ETF, which is the double inverse of oil gas could be up for the day while oil was also up. A quick look at what DUG actually is gives the answer:

UltraShort Oil & Gas ProShares seeks daily investment results, before fees and expenses, that correspond to twice (200%) the inverse (opposite) of thedailyperformance of the Dow Jones U.S. Oil & Gas IndexSM

That daily part adds one complication to the picture. Fromthe article Understanding ProShares Long-Term Performanceon ProShares site:

ProShares are designed to provide either 200%, -200% or -100% of index performance on adailybasis (before fees and expenses).

A common misconception is that ProShares should also provide 200%, -200% or -100% of index performance over longer periods, such as a week, month or year. However, ProShares returns may be greater than or less than what youd expect over longer periods.

The article goes on to explain how why this happens. But the question about how DUG could be up while the price of oil was also up is answered by looking at what comprises DUG the Dow Jones U.S. Oil & Gas Index. That index measures the performance of the energy sector of the U.S. equity market.Component companies include oil drilling equipment and services, coal, oil companies-major, oil companies-secondary, pipelines, liquid, solid or gaseous fossil fuel producers and service companies.

Note that the actual price of oil is not mentioned. When you look at how that index is constructed youll see that ExxonMobil Corp. (XOM) makes up 28%, Chevron Corp. is 11% and ConocoPhillips is 7%. So at least 46% of the index is big oil companies (major integrated oil gas). Then the question is how does the price of oil relate to movements in those oil companies? Or more broadly, how do ETFs compare against the underlying over longer periods of time?

Below Ive plotted oil ($WTIC) vs. the ETF tracking oil (USO) over the last 10 years.

This shows that the price of oil has seriously outperformed the ETF, USO.Bottom line, be careful with which ETFs you are holding long.

On any given day, ETFs and the underlying asset can trade opposite each other. And that means that DUG, on any given day, could trade with oil instead of opposite oil. I think many people would assume that if oil was down 5% DUG would be up 10%. Thats clearly not a good assumption to make Im seeing a lot of people talking about buying DUG to profit from a drop in oil prices. Given the performance data above I think theyd be better off shorting USO. (That is, if they can find shares of it to borrow Ive had problems with that in the past.) Puts on USO may do the trick too.

Hopefully those who are trading DUG know that theyre not playing the price of oil directly and wont be surprised on days like today when DUG and oil trade in the same direction.Youve always got to know what comprises any ETF.I know that Google directs a lot of people to my list of inverse ETFs who are specifically searching for a way to short oil. Hopefully they do more research than just look at the name of the ETF and really find out what theyre getting.

For more on this topic, ETFDB has a good post,7 Risks of Trading Leveraged ETFs and How to Avoid Them.

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Hi, my name is Blain Reinkensmeyer and Im the guy behind . I started investing when I was 14, day traded professionally for several years, and have placed several thousand stock trades over my career.Read more about me

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