Guide to the 10 Most-Popular Leveraged Inverse ETFs

With the ETF industry gaining in leaps and bounds in recent years, the use of leveraged inverse ETFs (often known as ultra-short funds) has grown rapidly. These products occupy a small slice of the ETF space.

Leveraged inverse ETFs provide opposite exposure that is a multiple (-2X or -3X) of the performance of the underlying index. These funds employ various investment strategies such as use of swaps, futures contracts and other derivative instruments to accomplish their objectives. Due to their compounding effect, investors can enjoy higher returns in a very short period of time, provided the trend remains a friend (read: 5 Leveraged/Inverse ETFs That Gained Double Digits in August).

Since most of these ETFs seek to attain their goals on a daily basis, their performance could vary significantly from the inverse performance of their underlying index or benchmark, over a longer period when compared to the short period (such as, weeks, months or years) due to their compounding effect. This phenomenon can be explained with an example below.

Imagine that an investor buys a leveraged inverse ETF for $100 that has two times (2X) exposure to the underlying index of say 10,000. If the index goes up by 1% to 10,100 on day 1, then the market price of the ETF moves down by 2% to $98 on the same day. Again, when the index goes up by another 1% to 10,201 on day 2, then the ETF value goes down by another 2% to $96.04. Over the last two days, the index is up by 2.01% while the ETF is down by 3.96% (approximately two times as stated by the fund objective). As a result, the performance of the fund and index can vary as we take longer periods for consideration.

Investors should also note that leveraged inverse ETFs involve a great deal of risk when compared to the traditional funds. They are often more costly and can be less tax-efficient, as they can see capital gains through the use of swaps and other derivatives instruments.

How to Play?

Still, the space remains incredibly popular for investors looking to mint money in a very short period of time provided the trend remains a friend. For these traders, there are close to 100 leveraged inverse funds in the space targeting different asset classes.

In this article, we take a look at the 10 biggest and most-popular ETFs for those investors who are new to the leveraged inverse technique. While these products might not necessarily be the best choices in their respective markets, they have become popular vehicles in this sector.

Here’s a quick guide to the ETFs that could provide investors a great assistance in choosing a heavily traded—and thus hopefully a tight bid-ask spread product—for their portfolios:

ProShares UltraPro Short QQQ SQQQ

Leveraged Factor: 3x
Benchmark Index: Nasdaq-100 Index

This is the most-popular and liquid ETF in the leveraged inverse space with AUM of $1.2 billion and average daily volume of over 12.5 million shares a day. The fund seeks to deliver thrice the inverse return of the Nasdaq-100 Index, charging investors 0.95% in expense ratio.

ProShares UltraShort S&P500 SDS

Leveraged Factor: 2x
Benchmark Index: S&P 500 Index

This product provides two times inverse exposure to the S&P 500 Index, charging 90 bps in fees and expenses. It has been able to manage more than a billion dollar in its asset base with daily trading volume of around 5.9 million shares.

ProShares UltraShort 20+ Year Treasury TBT

Leveraged Factor: 2x
Benchmark Index: ICE U.S. Treasury 20+ Year Bond Index

This ETF seeks to make large profits from the bearish trend in the Treasury bond market. It provides two times inverse exposure to the daily performance of the ICE U.S. Treasury 20+ Year Bond Index, charging investors 89 bps in annual fees. The product has amassed $734.8 million in AUM and trades in average daily volume of 3 million shares (read: Play the Bond Bull Market With These ETFs).

ProShares UltraPro Short S&P500 SPXU

Leveraged Factor: 3x
Benchmark Index: S&P 500 Index

This product provides triple leveraged inverse play to the S&P 500 index, charging 91 bps in fees and expenses. It has been able to manage $646.8 million in its asset base with daily trading volume of around 5.4 million shares.

Direxion Daily S&P 500 Bear 3X Shares SPXS

Leveraged Factor: 3x
Benchmark Index: S&P 500 index

With AUM of $457.4 million, this ETF also offers triple inverse exposure to the S&P 500 index.  It has accumulated $457.4 million in its asset base while trades in average daily volume of around 7.4 million shares.

Direxion Daily Gold Miners Index Bear 3X Shares DUST

Leveraged Factor: 3x
Benchmark Index: NYSE Arca Gold Miners Index

This product seeks to deliver thrice the inverse daily performance of the NYSE Arca Gold Miners Index, which consists of firms that operate globally in both developed and emerging markets, and are involved primarily in the exploration and production of gold. It is rich in AUM of $454.5 million and trades in solid volume of nearly 9.2 million shares. Expense ratio comes in at 0.91% (read: 5 Reasons to Buy Gold ETFs as Price May Touch $2000).

ProShares UltraShort QQQ QID

Leveraged Factor: 2x
Benchmark Index: Nasdaq-100 Index

This fund tracks the NASDAQ-100 Index but offers twice the inverse returns of the daily performance with the same expense ratio of 0.95%. It has managed AUM of $305.9 million and sees 3.1 million shares in average daily volume.

Direxion Daily Small Cap Bear 3X Shares TZA

Leveraged Factor: 3x
Benchmark Index: Russell 2000 Index

Investors seeking to ride out the bearish sentiments in the small-cap space in a very short period of time could make a play on TZA. This is because it provides three times the inverse return of the daily performance of the Russell 2000 Index and exchanges around 2.7 million shares in hand on average. The fund has AUM of $299.6 million and charges 95 bps in fees and expenses.

VelocityShares 3x Inverse Crude Oil ETN DWT

Leveraged Factor: 3x
Benchmark Index: S&P GSCI Crude Oil Index ER

This ETF targets the energy segment of the commodity market from a bearish point of view. It seeks to deliver thrice the inverse returns of the S&P GSCI Crude Oil Index ER and has attracted $236.9 million in its asset base. Though the fund charges a higher fee of 1.50% per year, its average daily volume is incredible exchanging about 14.2 million shares a day (read: Spate of Positive News Boosts Oil ETFs).

ProShares UltraPro Short Dow30 SDOW

Leveraged Factor: 3x
Benchmark Index: the Dow Jones Industrial Average

This ETF targets the Dow Jones Industrial Average Index with three times inverse exposure. It charges 95 bps in annual fees and has amassed $233.7 million in its asset base. Volume is good, exchanging 1.3 million shares in hand.

Bottom Line

Investors should note that ProShares has been the leader in the leveraged inverse ETF space with most of the popular products coming from this issuer. These ETFs are not confined to one asset class or a specific sector but are spread out across various corners of the world. With a bearish outlook, these funds could pile up abnormal returns in a shorter period of time (see: all Inverse Equity ETFs here).

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Direxion Daily S&P 500 Bear 3X Shares (SPXS): ETF Research Reports
 
ProShares UltraShort 20+ Year Treasury (TBT): ETF Research Reports
 
ProShares UltraPro Short QQQ (SQQQ): ETF Research Reports
 
ProShares UltraPro Short Dow30 (SDOW): ETF Research Reports
 
Direxion Daily Gold Miners Index Bear 3x Shares (DUST): ETF Research Reports
 
ProShares UltraPro Short S&P500 (SPXU): ETF Research Reports
 
Direxion Daily Small Cap Bear 3X Shares (TZA): ETF Research Reports
 
ProShares UltraShort S&P500 (SDS): ETF Research Reports
 
ProShares UltraShort QQQ (QID): ETF Research Reports
 
Velocityshares 3X Inverse Crude Oil Etn (DWT): ETF Research Reports
 
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