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To me some of these products look like they are designed in a the-house-always-wins manner, especially when one looks at their 1yr or 5yr charts. This observation applies for general ones bearish on like the whole S&P's or for ones even in specific sectors like tech or finance.

Is this always their nature: to have such massive decay? I do understand that there are interest rate payments and upkeep costs associated with them. And assuming there is a bear market, how can attempted to rate them against other potential bearish investments?

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In the short term, inverse ETFs (standard or leveraged) perform as advertised. They "almost" negatively mirror the performance of the respective counterpart. What you don't see in that view is that the "almost" is a few basis points of under performance each day which becomes much more significant and obvious when you look at 1yr or 5yr charts. That's the nature of daily decay.

Check out the performance of DJIA, NAZ and Russell ETFs and inverse ETFs during the February correction (1x, 2x and 3x). Daily returns for each were "almost" negatively equal. There's that "almost" again".

In terms of construction, the house doesn't win from the decay and expense within these products. Your broker does nicely but that's irrelevant to this.

I'm not sure how to answer your question about rating these against other potential bearish investments. What others? ETF versus inverse ETF? Shorting? Options? Be that as it may, each strategy has its own merits and disadvantages. For example, with long vs inverse ETFs (same leverage), If the borrow cost is lower than the decay/expense rate of the inverse, simply short the market proxy. I don't think that one will make a significant difference with one over the other. If you get on the right side of the trade (short in a bear), that's where the bang for the buck is. If you buy a 3x inverse and it returns 2.8x instead of what's advertised, is that the end of the world? Make money, be happy!

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  • So it is the nature of the inverse ETF to experience such price decay. I was skeptical of why it happens so I believe I was a bit precarious with the-house-always-wins.
    – theAngryPhysicist
    Mar 4, 2018 at 20:59
  • I believe the word I was looking for is 'proxy' for other bearish investments - for example how gold was used as a hedge for sometime during the Great Recession. If we were to say gold was a good proxy short for that time, what you are saying is that it really doesn't matter as long as it is on the right side of the trade. Edit: I would upvote but I'm one rep point shy so please excuse me in the meantime.
    – theAngryPhysicist
    Mar 4, 2018 at 21:04
  • I am beginner and only exposing myself to retail products so I am limited to using ETF's and stocks. I am learning about more complex derivatives as I go but I am not comfortable with them just yet.
    – theAngryPhysicist
    Mar 4, 2018 at 21:17
  • @Shagster: There are multiple variables here (expenses, decay, rebalancing) and the degree of effect depends on the multiple. For example, SPY is $250 and it rises 2%, it goes to $205. Suppose the 2x long is also $250 then it goes to $260. The 2X long now has to rebalance the portfolio and increase long exposure. If SPY dropped then the 2X would have to decrease exposure. This rebalancing creates divergent results if these leveraged are for longer periods. Google "Beta slippage" for info about this aspect of ETfs.
    – Bob Baerker
    Mar 4, 2018 at 21:34
  • @Shagster: Gold is an iffy proposition for hedging during recessions. Sometimes it correlates, sometimes not. For example, in 2008, as the markets collapsed, gold lost about 25% of its value. Google "Macrotrends Gold" to see a 100 year graph of both. Thanks for the thought but an upvote is nothing that I care about. No worries :->)
    – Bob Baerker
    Mar 4, 2018 at 21:35

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