It appears that Inverse ETF's will be available at some point on time, on the ASX.
So Inverse Charts may become a common feature on HC.
http://www.newsmaker.com.au/news/8761
BlackRock Global Head of ETF Research and Implementation Strategy, Deborah Fuhr, said no Australian ETFs rely heavily on derivatives, although providers have filed some requests here to list leveraged or inverse ETFs. "We see some public filings to launch leveraged and inverse ETFs, however, at this stage, no heavily synthetic ETFs are traded in Australia."
The second strategy is to buy shares in inverse exchange traded funds (also known as short or bear ETFs). To cater for retirement fund investors who are not allowed to do short selling of stocks, fund management companies like ProShares has come up with some interesting ETFs which have an inverse correlation with an index to allow these investors to profit from a falling market.
For example, they have an ETF called the Short S&P500 fund (SH) whose price will go up when the S&P 500 index goes down. As you are buying shares and not options, there is no expiry date on these assets. In order to achieve the inverse exposure to the index, these funds invest in derivatives like futures contracts and swap agreements. The investment objective of the fund is to seek inverse returns daily.
For example, if the S&P500 index goes down 3% in one day, SH should go up 3% on the same day. As with any investments, these ETFs do have risks so it is important that you understand these risks before you invest in them.
The most important risk to understand about short ETFs is the correlation and compounding risk if the ETF is held for longer than one day. While the ETF does provide a 1-1 inverse correlation in one day, this may not be true if the shares are held for longer periods.
Depending on how the market moves, the performance of inverse ETFs may be greater or less than the index performance.
I bought some SH shares in October 2009. Since then, the S&P500 index has gone up 4 % but my SH shares have gone down 7%.
ProShares also charges management fees of 0.95 % per year for the Short S&P 500 fund and this will affect the returns from this ETF.
It is also important to understand that investing in short ETFs is different from short selling shares, which is not allowed for SMSFs.
The maximum risk is for your investment to go to zero, which is no different from investing in normal shares. Because the returns are calculated daily, it is unlikely you will lose all of your investment even if the index that you are shorting goes up more than 100%, unless it happens in one day.
On May 6, the US markets had perhaps the biggest one-day move in history. The S&P 500 fell as much as 100 points that day which is still only an 8.5% move. This goes to show how unlikely it is for an index to make a 100% move in one day.
Inverse ETFs are currently only available for US stock indexes. Hence, it is probably not suitable as a hedging instrument for an Australian stock portfolio.
(20min delay)