• You can use inverse and leveraged exchange-traded funds to take advantage of price swings in today’s volatile markets.
• Inverse ETFs enable traders to profit from market declines without short-selling, while leveraged ETFs can amplify gains during market rallies or “dead-cat bounces.”
• These high-risk, high-reward tools demand active management, making popular among active traders with clear, short-term strategies and the agility to respond quickly to sudden market shifts.

A tidal wave of turbulence has cascaded over the markets in the first quarter of 2025. But the resulting volatility isn’t merely a disruption—it’s the new norm. Of late, the markets are characterized by sharp, unpredictable swings, creating an opportunity for inverse and leveraged exchange-traded funds (ETFs). They enable investors to capitalize on amplified market movements, whether they’re riding a bearish pullback or taking advantage of a snapback rebound.

Inverse ETFs, for example, are tailored to capitalize on bearish sentiment, without the complexity of short selling. They provide a simple way to profit from market declines by tracking the opposite performance of an index or asset. When the market dips, inverse ETFs rise, turning negative sentiment into an opportunity. On the other hand, leveraged ETFs offer an exciting avenue for profiting from market rebounds, such as a “dead-cat bounce.” They can amplify returns to the upside. Today, we delve into these products, exploring the opportunities they present and the risks they carry.

How inverse ETFs benefit from downturns

In a market where fear and uncertainty drive the narrative, inverse ETFs offer a way to profit from the very thing others are fleeing—declining prices. These funds enable traders to harness the power of market downturns without the need for complex short-selling strategies. Instead, inverse ETFs use derivatives like futures contracts, options and swaps to achieve their inverse exposure. These instruments make it possible for the ETF to provide the opposite performance of the index or asset it tracks, effectively turning a bearish market environment into an opportunity for profit.

When the S&P 500 falls, for instance, an inverse ETF tracking this index rises. Some of the most popular inverse ETFs include the ProShares Short S&P 500 (SH), which offers a 1x inverse return of the S&P 500, and the ProShares UltraShort S&P 500 (SDS), delivering double the inverse return at 2x. Inverse ETFs aren’t just for broad market indices—they also target individual stocks. For example, the GraniteShares 2x Short NVDA Daily ETF (NVD) aims for 2x the inverse return of Nvidia (NVDA), while the Tradr 2X Short TSLA Daily ETF (TSLQ) does the same for Tesla (TSLA), giving traders the ability to profit from declines in specific high-profile stocks.

To illustrate how this works, let’s say the S&P 500 drops by 2% in a single day. If you’re holding the ProShares UltraShort S&P 500 (SDS), which provides a 2x inverse return, your position would rise by approximately 4%. However, if the S&P 500 rises by 2%, your position would fall by 4%, amplifying the losses. This example shows how inverse ETFs can exaggerate both potential gains and losses. Yet, unlike short selling, inverse ETFs come with a capped risk. The most you can lose is the amount you invested, while short selling exposes you to theoretically unlimited losses if the market moves against you.

While inverse ETFs are effective for profiting from market declines, they are designed for short-term trades. Because of their daily rebalancing, the performance of these ETFs can diverge from the underlying index over time, especially in volatile or sideways markets. As a result, investors need to monitor their positions closely, aware that the compounding of daily returns can lead to larger-than-expected losses if held too long. Inverse ETFs are used when there’s a clear, short-term strategy in mind, and an understanding of the risk is essential before jumping into fray.

Capitalizing on market rebounds with leveraged ETFs

While inverse ETFs thrive on market declines, leveraged ETFs are built to harness the power of a market comeback. These funds don’t just ride the wave—they turbocharge it. Whether it’s a brief “dead-cat bounce” or the start of a longer recovery, leveraged ETFs multiply the returns of a rally, and traders can capture amplified gains as markets shift direction.

Leveraged ETFs achieve this by using financial derivatives like futures contracts, options and swaps to deliver multiples of the daily return of an underlying index or asset. A 2x leveraged ETF, for instance, aims to double the daily return of its benchmark, offering traders an opportunity to capture larger gains when the market moves in their favor. Popular leveraged ETFs include the ProShares Ultra S&P 500 (SSO), which targets 2x the daily return of the S&P 500, and the Direxion Daily TSLA Bull 2X Shares (TSLA), which offers 2x the return of Tesla. For those focused on the tech sector, the Direxion Daily NVDA Bull 2X Shares (NVDU) provides 2x the daily performance of Nvidia’s stock, amplifying potential profits as the stock rises.

To illustrate how leveraged ETFs work, suppose the S&P 500 increases by 3% in a day and you hold the ProShares Ultra S&P 500 (SSO), which targets 2x the daily return. In this case, your position would rise by 6% because the ETF doubles the performance of the index. However, if the S&P 500 drops by 3%, your position would fall by 6%, reflecting the amplified downside. This magnified exposure is the core appeal of leveraged ETFs—they help traders capitalize on short-term upward market movements. But that power comes with equal risk. If the market moves against you, the losses are amplified as well.

Leveraged ETFs are high-risk, high-reward tools, best-suited for short-term strategies. That’s because they rebalance daily, which means their performance can diverge significantly from the underlying index over time, especially in volatile or sideways markets. While they offer the potential to capture attractive short-term gains, traders must be acutely aware of the risks involved.

Takeaways

Inverse and leveraged ETFs provide powerful opportunities to capitalize on market volatility, but they are not without challenges. The very volatility that makes them attractive also heightens the potential for risk. They are designed for a specific kind of trader: One who thrives on rapid, short-term market movements and has the discipline to monitor positions closely. They’re not for those seeking steady, long-term growth or stability because their value is directly tied to the daily fluctuations of the market.

Amid the current market conditions, where uncertainty and volatility are at the forefront, the risks and rewards of these ETFs become amplified. Leveraged ETFs can turbocharge gains during a rally, while inverse ETFs enable traders to profit from market declines. But the flip side is they also magnify losses, which can quickly become overwhelming if not carefully managed.

As such, these products require more than just market knowledge—they require constant vigilance, a clear strategy and an understanding that even the smallest market shift can have material consequences. If used properly, these tools can be powerful instruments for capturing opportunity in chaotic markets, but they also demand precision, and a well-defined risk management plan. 

Andrew Prochnow, Luckbox analyst-at-large, has more than 15 years of experience trading the global financial markets, including 10 years as a professional options trader.