Betting Against Wall Street: The Inverse ETF Surge No One Is Talking About

It's been nearly two decades since the Global Financial Crisis sparked a wave of bank failures, casting a dark cloud over the financial services sector. Fortunately, things are different today. Broadly speaking, large U.S.-based banks are on solid footing.

That doesn't mean bank stocks will behave like high-octane tech names, but the group is a value destination and an increasingly resurgent source of dividend growth. If there's a "dark side," it's that some investors have long memories. Many of today's market participants were invested during the crisis or old enough during that calamity to comprehend its gravity.

For risk-tolerant traders, this ETF is a great way of being bearish on financial stocks. Image source: Getty Images.

So it's plausible that even to this day, some investors are skittish about the financial services sector. Some may even want to tempt fate and embrace an exchange-traded fund (ETF) such as the ProShares UltraShort Financials ETF (NYSEMKT: SKF). There are risks and potential rewards accompanying that strategy.

Not just bearish, but ultra-bearish

From this fund's title, investors can infer that this is an inverse ETF, meaning it's a bearish bet on an underlying asset or index. In that case, that index is the S&P Financial Select Sector index, which comprises the financial services stocks in the S&P 500.

Here's where things get interesting. This ProShares fund isn't just an inverse product; it's a leveraged ETF. It's designed to deliver -2x of the daily performance of the aforementioned financial services gauge. This is how that plays out in real, recent time. On Feb. 18, that index gained 0.85%, but the ProShares ETF slipped 1.69%. For better or worse, mostly the latter, the ETF behaved as expected on that day.

Sure, this bearish financials ETF can be tempting, particularly for traders who have been watching The Big Short and Margin Call -- but there's a big "but." Actually, a couple of them. First, pinpointing when another bank stock bear market, let alone a crisis, will arrive is a near-impossible task.

With that in mind, newer traders may be tempted to hold an inverse or geared ETF for weeks or months, but that strategy isn't suitable for most market participants. Don't just take my word for it. ProShares cautions investors that leveraged ETFs shouldn't be expected to deliver their stated daily objectives over periods of more than a single day.

What is this ETF suitable for?

Let's work on the assumption that another banking crisis isn't right around the corner. Even with that, the ProShares UltraShort Financials ETF remains a valuable tool for tactical traders. It can be used as a short-term hedge on long positions in financial services stocks. Likewise, this and other leveraged sector ETFs can be valuable tools for capitalizing on company- or sector-specific news, such as earnings reports.

This ETF may also offer short-term protection on long exposure to Berkshire Hathaway and JPMorgan Chase, as those stocks combine for 23% of the underlying index's weight. Just remember that this ETF and its brethren are short-term trades, not long-term buy-and-hold investments.

JPMorgan Chase is an advertising partner of Motley Fool Money. Todd Shriber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway and JPMorgan Chase. The Motley Fool has a disclosure policy.