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5 Inverse ETFs Gain on Broad Market Sell-Off

Sweta Killa

After weeks of solid gains, Wall Street tumbled with all three major indexes posting their biggest single-day declines since Mar 16. Growing fears of a second wave of coronavirus infections and a gloomy outlook from the Federal Reserve led to risk-off trading.

COVID-19 has resurged in some 20 states in the United States that reopened weeks ago. Alaska, Arkansas, Arizona, California, Kentucky, Mississippi, Montana, North Carolina, Oregon, South Carolina, Texas and Utah reported strong upticks in case counts or hospitalizations.

The Federal Reserve, in the FOMC meeting concluded on Jun 10, warned that the U.S. economy will contract by 6.5% in 2020 before rebounding 5% next year. The central bank predicts that the unemployment rate will fall to 9.3% by the end of this year. Though this is down from 13.3% in May, it will be substantially above the 3.5% rate recorded in February — a near 50-year low. Inflation was forecast to remain below the Fed’s 2% target through 2022. The central bank also kept rates at the current low levels through 2022 and has pledged to continue pumping in stimulus until the economy is back on track (read: Sector ETFs & Stocks to Explode as Fed Remains Dovish).

The broad market sell-off has resulted in a spike for inverse or inverse leveraged ETFs. These products either create a short position or a leveraged short position in the underlying index through the use of swaps, options, future contracts and other financial instruments. Due to their compounding effect, investors can enjoy higher returns in a short period of time, provided the trend remains a friend.

However, these funds run the risk of huge losses compared with the traditional ones in fluctuating or seesawing markets. Further, their performance could vary significantly from the actual performance of the underlying index over the longer period compared to a shorter period (such as, weeks or months).

We have highlighted the five best leveraged inverse ETFs of the day that piled up more than 20% gains, though these involve a great deal of risk when compared to traditional products.

Daily S&P 500 High Beta Bear 3X Shares HIBS – Up 31%

This ETF offers three times inverse exposure of the performance of the S&P 500 High Beta Index. It has gathered $26.4 million in AUM and trades in average daily volume of 201,000 shares. The fund charges 95 bps in fees per year from investors

MicroSectors U.S. Big Oil Index -3X Inverse Leveraged ETN NRGD – Up 30.9%

NRGD offers three times inverse exposure to the Solactive MicroSectors U.S. Big Oil Index. The ETN has accumulated $14.2 million in its asset base. It charges 95 bps in annual fees and trades in average daily volume of under 11,000 shares.

MicroSectors U.S. Big Banks Index -3X Inverse Leveraged ETN BNKD – Up 48.8%

BNKD seeks to offer three times leveraged exposure to the Solactive MicroSectors U.S. Big Banks Index. The ETN has accumulated $5.9 million in its asset base. It charges 95 bps in annual fees and trades in average daily volume of about 13,000 shares (read: Expect an Explosive Rally in Top-Ranked Bank ETFs).

Direxion Daily Small Cap Bear 3x Shares TZA – Up 22.3%

This product provides three times inverse exposure to the Russell 2000 Index, charging 95 bps in fees and expenses. It has been able to manage $675.1 million in its asset base with heavy average daily volume of 9.5 million shares.

ProShares UltraPro Short MidCap400 ETF SMDD – Up 21.8%

This product provides three times inverse exposure to the S&P MidCap 400, charging 95 bps in fees and expenses. It has been able to manage $12.3 million in its asset base with moderate average daily volume of 57,000 shares.

Bottom Line

While the strategy is highly beneficial for short-term traders, it could lead to huge losses compared with traditional funds in fluctuating markets (see: all the Inverse Equity ETFs here).

Still, for ETF investors, who are bearish on equities for the near term, either of the above products could make an interesting choice. Clearly, these could be attractive for those with high-risk tolerance, and a belief that the “trend is the friend” in this specific corner of the investing world.

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