How does an inverse ETF work? Does the underwriting company issuing the ETF just short the shares of the underlying(s)? Or do they purchase(sell) the near month put(call) options and keep rolling them over?

For example, let us consider the inverse ETF SH, which inversely tracks the S&P 500.

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Short ETFs hold derivatives, such as options, futures, and swaps, to attempt to track the inverse (or sometimes a multiplier of the inverse) of an index, on a daily basis (so not 'over time' but each day mirror the performance of that index).

SH, for example, holds the majority of its exposure in S&P500 Index swaps with various banks:


30% in a UBS swap, 17% with BofA, 15% with Goldman Sachs; about 85% of their exposure is in these swaps. They then hold enough cash to cover all of these positions (they're officially listed as having a 200% position in cash and a -100% position in various deravitives).

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