Streamline the Short: Strategic Hedging with -1X Inverse ETFs
Traditional hedging approaches – such as short selling, options, or futures – are often operationally complex, costly, and margin-intensive. -1X inverse ETFs offer a less complicated, packaged solution: registered securities that trade like stocks, while using derivatives to achieve inverse exposure.
Key benefits of -1X inverse ETFs include:
- Tactical short-term hedging without derivatives or margin
- Quick implementation during volatile market conditions
- Ability to target broad market, sector, or single-stock exposure
- Eligible for use in ERISA accounts, where shorting is typically prohibited
Fund Objective: To provide the inverse (-100%) of the daily return of a benchmark index, sector, or individual stock.
Mechanism: These ETFs utilize derivatives, such as swaps and futures, to deliver their daily inverse performance. Unlike traditional derivative instruments, they are registered securities that can be traded intraday on exchanges like stocks.
It is important to note that because inverse ETFs reset daily, their performance over periods longer than one day may deviate from a simple inverse of the underlying asset’s cumulative return, especially in volatile markets. Therefore, they are best suited for short-term tactical strategies requiring active monitoring.
There will be subtle deviations, over time, between the underlying and inverse ETF returns due to the compounding affected by the daily reset.
For illustrative purposes only.
- Broad Market and Sector Inverse ETFs: Track major indices such as the S&P 500 or sector-specific indices
- Single-Stock Inverse ETFs: Target individual companies, such as Nvidia or Tesla
- Taking an Outright Bearish View
a. Express a tactical bearish outlook without using margin or complex derivatives
b. Defined downside risk profile
c. Easily deploy across indices or individual stocks - Hedging Unrealized Gains
a. Protect concentrated stock or index gains temporarily without triggering tax events
b. Single-stock inverse ETFs provide precise company-level hedging - Reducing Beta and Stock-Specific Risk
a. Reduce overall portfolio sensitivity during uncertain periods
b. Hedge sector, style, or company-specific risks
The table below illustrates the cumulative impact of Tesla’s (TSLA) largest 5-day drawdown in 2025 (Feb 21– 27), during which the stock declined by approximately 22.23%. In contrast, a -1X inverse ETF (such as TSLS) delivered a cumulative gain of approximately 22.39%, reflecting its daily reset structure and effectiveness for short-term tactical hedging. This example underscores how inverse ETFs can mitigate risk when used with precision during periods of sharp equity declines.
TSLS - Direxion Daily TSLA Bear 1X Shares. The performance data quoted represents past performance. Past performance does not guarantee future results. Brokerage commissions will reduce returns.
There will be subtle deviations, over time, between the underlying and inverse ETF returns due to the compounding affected by the daily reset. While -1X ETFs are optimized for daily performance, they may be less subject to decay than leveraged -2X or -3X products. For investors capable of monitoring positions frequently, -1X products can provide an effective short-term hedge or tactical bearish expression with a less volatile decay profile over moderate holding periods.
Compared to traditional hedging techniques, -1X inverse ETFs offer a streamlined, accessible, and cost-efficient alternative. They are particularly effective for tactical short-term hedging where ease, transparency, and execution speed are priorities.
For financial professionals seeking tactical, scalable, and efficient methods of risk management, -1X inverse ETFs – both broad market and single-stock – offer a compelling solution.
By using inverse ETFs to express bearish views, protect unrealized gains, or navigate tax rules such as the wash sale restriction, investors can achieve precise portfolio adjustments without the burdens of traditional derivatives or margin trading.
As with any hedging strategy, thoughtful execution, active monitoring, and professional oversight are
essential.
Short Selling: Short selling is an investment strategy that speculates on the decline in a stock or other security’s price. An investor borrows shares and sells them on the open market, planning to buy them back later at a lower price. If the price drops, the investor profits by buying the shares back at the reduced price and returning them to the lender. It carries unlimited risk if the security’s price rises instead.
Options: Options are financial derivatives that give buyers the right, but not the obligation, to buy or sell an underlying asset at a specified price before a certain date. The two main types are: Call options (right to buy) and Put options (right to sell).
Futures: Futures are standardized contracts obligating the buyer to purchase (or the seller to sell) an asset at a predetermined price on a future date. These are commonly used for hedging or speculation on commodities, currencies, and financial instruments.
Margin: Margin refers to borrowed money that investors use to purchase securities. It allows for greater exposure than the investor’s cash alone would allow, amplifying both potential gains and potential losses. Trading on margin involves a margin account and is subject to margin requirements set by the broker and regulators.
ERISA: ERISA (Employee Retirement Income Security Act of 1974) is a federal law that sets minimum standards for most voluntary retirement and health plans in private industry to protect individuals in these plans. It governs fiduciary duties, reporting, and plan funding, but does not require employers to establish plans.
Swaps: Swaps are derivative contracts through which two parties exchange the cash flows or liabilities of two different financial instruments. The most common type is an interest rate swap, where one stream of future interest payments is exchanged for another, often switching between fixed and floating rates.
Beta: Beta is a measure of a stock’s volatility in relation to the overall market. A beta of 1 indicates that the stock tends to move with the market. A beta greater than 1 implies higher volatility, while a beta less than 1 indicates lower volatility relative to the market.
Naked Calls: Naked calls are call options that are sold without owning the underlying security. This is a risky options strategy where the seller is exposed to theoretically unlimited losses if the security’s price rises significantly, since they would have to purchase the security at market price to deliver it at the strike price.
Put Options: Put options are financial contracts that give the holder the right, but not the obligation, to sell an asset at a specified price (strike price) before a specified expiration date. Investors use puts to hedge against declines or to speculate on downside moves.
Futures Contracts: Futures contracts are legally binding agreements to buy or sell a particular asset at a predetermined price at a specified time in the future. They are traded on exchanges and used by both hedgers and speculators. Futures cover assets like commodities, indexes, currencies, and interest rates.
Wash Sale: A wash sale occurs when an investor sells a security at a loss and then repurchases the same or a ‘substantially identical’ security within 30 days before or after the sale. Under IRS rules, the loss from the sale cannot be claimed as a tax deduction, and instead, the disallowed loss is added to the cost basis of the repurchased security.
Trade Through Downturns with Direxion's Inverse & Leveraged Inverse ETFs
Leveraged and Inverse ETF traders know that the opportunity to take advantage of short-term trends is only won if you get the direction right. That’s why Direxion offers a range of Inverse and Leveraged Inverse ETFs, so you can seek to profit from, or hedge against, a further downturn.
