The Case for Using Inverse Leveraged ETFs as a Hedging Strategy

You might think that leveraged and inverse leveraged exchange-traded funds (ETFs) are only for those looking to capitalize on short-term market volatility. But for sophisticated traders, these securities can also serve as a tool for a specific purpose within broader investment portfolios, too. In skilled hands, these funds can serve in both offensive and defensive roles, helping investors take advantage of market events and manage the risk in their portfolios.

Here’s a look at how these ETFs can complement a broader investment portfolio.

Using a short-term investment as a hedge for long-term positions

As anyone who plays or watches hockey knows, sometimes you need a strong defence to have a good offence. The same logic can apply to a broader investment portfolio. Regardless of how well your portfolio may be performing, a loss could undermine years of hard work and take a significant amount of time to recover.

With that in mind, inverse and inverse leveraged funds could be used to potentially soften the impact of a market pullback. It’s called hedging. If you think a decline is coming, holding an inverse leveraged ETF that targets the same asset class or index you already own could yield positive returns, possibly offsetting losses in your long-term portfolio.

You might wonder, why hedge if you can just sell your position or wait out the volatility? For one, dumping a fund to avoid turbulence can create tax consequences in non-registered accounts. Second, once you’re out of a position, it could be a lot harder to jump back in at the right time, which means you could miss out on a rally.

This last point is key: a hedge may not eliminate losses, but it can blunt the impact of a downturn while keeping you invested so you can still capture any upside in the event of a positive surprise. As well, with an inverse leveraged ETF, you can put a meaningful hedge in place without risking too much of your own capital.

As for waiting out volatility, that requires discipline, which can be hard to stick to – particularly if a pullback is deep or slow to recover. With inverse and inverse leveraged ETFs, it’s possible to reduce a portfolio’s ups and downs, which can alleviate the stress of sharp moves, encouraging you to stay invested. With the right hedge and hedging strategy in place, you could potentially also recover faster from a downturn, giving your long-term investments more time in the market to compound.

Using inverse ETFs to hedge known events

These ETFs can also complement some of your longer-term positions. Say you hold an unleveraged position in a Russell 2000 index ETF in your long-term portfolio, and you think that U.S. small caps are going to react negatively to a piece of economic news, such as a jobs report. Inverse leveraged ETFs are sometimes referenced as a way market participants seek to offset short-term index movements. The BetaPro -3x Russell 2000 Daily Leveraged Bear Alternative ETF (SRSL) is designed to provide daily triple inverse exposure to the price performance of the Russell 2000 Index. Here’s how that could look:

Under this scenario, making a smaller short-term trade into SRSL would have mitigated your losses by $300, while allowing you to maintain your long-term exposure and avoid potential tax consequences from selling your longer-term Russell 2000 Index ETF position instead.

Expanding the hedging tool kit

With a growing lineup of BetaPro 3x leveraged and inverse leveraged ETFs, longer-term sophisticated investors have additional instruments that are often mentioned in conversations about hedging strategies or short-term, tactical positioning. For instance, when inflation or rising interest rates are getting attention, long-term U.S. government bond prices can sometimes move lower. Some investors follow products linked to these bond movements to better understand how the market is moving. The BetaPro -3x U.S. Treasury 20+ Year Daily Leveraged Bear Alternative ETF (STLT) – built to provide three times the opposite of the daily price movement of long-term U.S. Treasury bonds – could act as a potential hedge against price drops in long-term U.S. government bonds, if, say, inflation suddenly spikes.

For sophisticated investors who want to hedge known risks or manage short bursts of volatility without dismantling their core portfolio, leveraged, inverse and inverse leveraged ETFs provide a liquid, capital-efficient way to adjust exposures. The key is sizing them up carefully and using them selectively as part of a broader allocation plan.

It’s important to remember leveraged ETFs are powerful tools, but they also carry unique risks, especially in volatile or choppy markets. While they may enhance daily gains, they can also magnify daily losses and experience decay if trends reverse. They’re only to be used as daily-trading tools, as their leverage resets daily, and are not recommended to hold longer than one day. Always do your due diligence by understanding the prospectus and ETF facts. Confirm your risk tolerance and capacity for risk. Or speak with a financial advisor before making leveraged, inverse and inverse leveraged ETFs a part of your trading strategy.

Like any investment, these strategies carry risks. However, with leverage, inverse and inverse leveraged ETFs, your potential loss is limited to your initial investment, whereas other strategies such as traditional shorting can result in losses beyond that.

Ultimately, while long-term sophisticated investors will always be more focused on holding a portfolio of stocks and bonds, there are ways to use shorter-term investments to protect a portfolio or take a position on a potential market move.

Disclaimers

Commissions, management fees and expenses all may be associated with an investment in products (the “Global X Funds”) managed by Global X Investments Canada Inc. The Global X Funds are not guaranteed, their value changes frequently and past performance may not be repeated. Certain Global Funds may have exposure to leveraged and inverse leveraged investment techniques that magnify gains and losses which may result in greater volatility in value and could be subject to aggressive investment risk and price volatility risk. Such risks are described in the prospectus. The prospectus contains important detailed information about the ETF. Please read the relevant prospectus before investing.

The Global X Funds include our BetaPro products (the “BetaPro Products”). The BetaPro Products are alternative mutual funds within the meaning of National Instrument 81-102 Investment Funds and are permitted to use strategies generally prohibited by conventional mutual funds: the ability to invest more than 10% of their net asset value in securities of a single issuer, to employ leverage, and engage in short selling to a greater extent than is permitted in conventional mutual funds. While these strategies will only be used in accordance with the investment objectives and strategies of the BetaPro Products, during certain market conditions they may accelerate the risk that an investment in shares of a BetaPro Product decreases in value.

The BetaPro Products consist of our Daily Bull and Daily Bear ETFs (the “Leveraged and Inverse Leveraged ETFs”), Inverse ETFs (the “Inverse ETFs”), and our BetaPro S&P 500 VIX Short-Term Futures™ ETF (the “VIX ETF”) and can offer opportunities for enhanced returns or hedging strategies, but it’s essential to understand and accept the associated risks. Leveraged ETFs aim to amplify the returns of an underlying index, which can lead to higher gains, but they also magnify losses in downturns. Similarly, inverse ETFs seek to profit from declines in the underlying index, meaning they can perform inversely to the market, but losses can accumulate quickly if the market moves against expectations. While these strategies will only be used in accordance with the investment objectives and strategies of the BetaPro Products, during certain market conditions they may accelerate the risk that an investment in shares of a BetaPro Product decreases in value. Investors should be aware of and understand their risk tolerance and capacity, and conduct their research before investing. An investment in any of the BetaPro Products is not intended as a complete investment program and is appropriate only for investors who have the capacity to absorb a loss of some or all of their investment.

Certain statements may constitute a forward-looking statement, including those identified by the expression “expect” and similar expressions (including grammatical variations thereof). The forward-looking statements are not historical facts but reflect the author’s current expectations regarding future results or events. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual results or events to differ materially from current expectations. These and other factors should be considered carefully and readers should not place undue reliance on such forward-looking statements. These forward-looking statements are made as of the date hereof and the authors do not undertake to update any forward-looking statement that is contained herein, whether as a result of new information, future events or otherwise, unless required by applicable law.

This communication is intended for informational purposes only and does not constitute an offer to sell or the solicitation of an offer to purchase investment products (the “Global X Funds”) managed by Global X Investments Canada Inc. and is not, and should not be construed as, investment, tax, legal or accounting advice, and should not be relied upon in that regard. Individuals should seek the advice of professionals, as appropriate, regarding any particular investment. Investors should consult their professional advisors prior to implementing any changes to their investment strategies. These investments may not be suitable to the circumstances of an investor.

All comments, opinions and views expressed are generally based on information available as of the date of publication and should not be considered as advice to purchase or to sell mentioned securities. Before making any investment decision, please consult your investment advisor or advisors.

Global X Investments Canada Inc. (“Global X”) is a wholly owned subsidiary of Mirae Asset Global Investments Co., Ltd. (“Mirae Asset”), the Korea-based asset management entity of Mirae Asset Financial Group. Global X is a corporation existing under the laws of Canada and is the manager, investment manager and trustee of the Global X Funds.

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Published February 12, 2026