Profit From Trump's Anti-Trade Policies With Inverse ETFs

Sweta Killa

May 31, 2019 at 11:10 a.m.

The decade-old U.S. bull market has been threatened by renewed trade fight lately. Escalation in tit-for-tat tariffs between the United States and China has shaken the Wall Street once again, resulting in global growth concerns.

President Donald Trump raised tariffs on Chinese goods worth $200 billion and China retaliated with as much as 25% tariff on $60 billion worth of U.S. imports effective Jun 1. Trump also threatened to blacklist Chinese firm Huawei Technologies, forbidding it from doing business with American companies. China might hit back by restricting rare-earth exports to the United States (read: Trade War Drags On: Time to Buy Bond ETFs?).

Additionally, the Trump administration threatened to slap tariffs on all goods coming from Mexico in a bid to curb illegal immigration. Washington will impose a 5% tariff from Jun 10 that will increase to 10% on Jul 1 if illegal immigration across the southern border was not stopped. Levies will then rise by 5% each month up to 25% by Oct 1. The tariff will permanently remain at the 25% level unless and until the crisis stops. The move will hit a number of companies especially in the auto sector. This is because American carmakers have built vehicles in Mexico for years, taking advantage of its cheap labor, trade deals and proximity to the United States.

The rounds of increase in tariffs will hurt U.S. consumers, driving up the prices of goods and thus curtailing spending. It will further impact worldwide economy and corporate profits, particularly at big U.S. exporters. All these will continue to weigh on the stock market. Investors could ride out the downbeat sentiments through inverse or leveraged inverse ETFs as these products offer big gains in a short span.

These products either create an inverse position or leveraged (200% or 300%) inverse position in the underlying index through the use of swaps, options, future contracts and other financial instruments. There are a number of inverse or leveraged inverse products in the market that offer inverse (opposite) exposure to the three major bourses. Investors should trade them cautiously, keeping their risk appetite in mind. Below we have highlighted them and the key differences between each (read: 5 Leveraged/Inverse ETFs That Are Up 20% Plus So Far in Q2):

S&P 500 Index

For investors seeking to bet against the S&P 500 Index, ProShares Short S&P500 ETF SH and Direxion Daily S&P 500 Bear 1X Shares SPDN are good choices. These provide unleveraged inverse exposure to the daily performance of the S&P 500 Index. SH is a popular and liquid option with AUM of $2 billion and average daily volume of more than 6.4 million shares.

ProShares UltraShort S&P500 ETF SDS seeks two times (2x) inverse exposure to the index while ProShares UltraPro Short S&P500 SPXU and Direxion Daily S&P 500 Bear 3x Shares SPXS provide three times (3x) inverse exposure. Out of the three, SDS is relatively popular and liquid, having amassed nearly $1 billion in AUM and 6.4 million shares in average daily volume.

Dow Jones

To bet against Dow Jones, ProShares Short Dow30 DOG, ProShares UltraShort Dow30 DXD and ProShares UltraPro Short Dow30 SDOW are the three options in the market. DOG offers unleveraged exposure to the index with AUM of $242.6 million and average daily volume of 785,000 shares. DXD provides two times inverse exposure with AUM of $139.7 million while SDOW having AUM of $248.3 million seeks three times exposure. Both these ETFs trades in average daily volume of more than million shares (read: Dow on Longest Losing Streak in 8 Yrs: 5 Stocks Still Up in ETF).

Nasdaq-100 Index

Similarly, ProShares Short QQQ PSQ provides unleveraged inverse exposure to the daily performance of the Nasdaq-100 Index. ProShares UltraShort QQQ QID seeks two times exposure while ProShares UltraPro Short QQQ SQQQ provides three times inverse exposure to the index. PSQ, QID and SQQQ have AUM of $619.2 million, $363.1 million and $1 billion, respectively. SQQQ has average daily volume of 8.8 million shares while QID and PSQ have average daily volume of 3.1 million shares and 2.4 million shares, respectively (read: 5 Tech ETFs Braving Trade Tensions in May).

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. Further, their performances could vary significantly from the actual performance of their underlying index over a longer period when compared with the shorter period (such as, weeks or months) due to their compounding effect (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 intriguing 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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Profit From Trump's Anti-Trade Policies With Inverse ETFs