Can you hedge against a market crash with ETFs?

Core Insights - The article discusses the limitations and challenges of using inverse ETFs as a strategy for market downturn protection, emphasizing that while they can provide short-term benefits, they are not suitable for long-term investment strategies [4][20]. ETF Strategies - Inverse ETFs are designed for short-term trading, aiming to deliver the opposite return of a benchmark on a daily basis, making them unsuitable for long-term protection [5][6]. - Leveraged inverse ETFs, such as Direxion Daily S&P 500 Bear 3X Shares, amplify the inverse relationship, targeting negative three times the daily return of the S&P 500 [7][8]. Performance During Market Events - During market selloffs, inverse ETFs can perform as intended, with examples from the March 2020 COVID-related market panic where these ETFs rose sharply as the S&P 500 fell [9]. - However, once the market recovers, both unleveraged and leveraged inverse ETFs tend to decline, highlighting their structural limitations for long-term holding [13]. Long-term Outcomes - A buy-and-hold strategy in inverse ETFs over a 17.1-year period would have resulted in significant losses, effectively going to zero after multiple reverse splits [15][16]. - The upward trend of the underlying benchmark, high fees, and daily compounding effects contribute to the poor long-term performance of inverse ETFs [19]. Implementation Challenges - Effective use of inverse ETFs requires precise market timing, which is difficult even for professional investors, making them risky for retail investors [14][20].