It seems the stock markets saw a splendid run last year only to nosedive this year. The investing climate has not really been in favor of the market since the beginning of 2014. Record chill winter, a slew of downbeat economic numbers, overvaluation in the U.S. stock markets, geo-political tension pertaining to Eastern Europe, sluggish growth in other developed nations of Euro zone and Japan and the hard landing in China – all played their roles to pull the market down from the record high level.
To add to this, the Fed was also taking itself apart from the bond buying business compounding investors’ jitters. While the bust of tech bubble and the high beta pain badly punished the U.S. equity markets, a few foreign markets also saw a sharp sell-off. While this recent spell of stock market turbulence marred the equity markets, it gave some investing corners reasons to cheer for. These are the inverse or bear ETFs.
We have highlighted four ETFs that have benefitted from this recent widespread crash and would be in focus in the weeks ahead, if the situation persists (read: 3 Low Risk ETFs for a Stormy Market):
ProShares Ultra Short Russell 2000 Growth (SKK)
Though the U.S. shows the way, global growth outlook has been muted this year with the IMF recently tapering global growth forecast on emerging market concerns. Not-so-enthusiastic U.S. data this year actually spurred concerns about its true growth picture among investors. As a result, growth ETF saw massive sell-offs which in turn helped the inverse product on Russell 2000 Growth index reap some gains.
This ProShares ETF corresponds to double the opposite exposure to the Russell 2000 Growth Index on a daily basis. The fund accumulated about $5.9 million in assets and charges 95 bps in fees per year which is in line with the category average. SKK was up 13.1% (as of April 10, 2014) last week.
Daily Small Cap Bear 3X Shares ETF (TZA)
Small-caps stocks are known for their highly volatile nature. Last year, small-caps were pretty overvalued and had a spectacular run with iShares Russell 2000 Index (IWM) returning about 35%. In this volatile market, small caps were likely be the most beaten down.
Also, investors should note that the outperformance of small caps is normally backed by the growing risk appetite among investors. With risk-off trade sentiment largely prevailing in the market, TZA stood to gain.
This Direxion ETF provides daily investment results of three times the inverse performance of the Russell 2000 Index. Unlike the case of SKK, this index takes care of all-capitalization – growth, value and blend with almost equal share.
Direxion Daily Japan Bear 3x Shares ETF (JPNS)
Japan – the world’s third largest economy – has been on a tear since the start of the year thanks to its lower-than-expected growth in the final quarter of 2013. Decline in private consumption and widening of trade deficit were held as culprits. To add to this, sales tax hike in April 2014 after 17 years – in an attempt to curtail on mounting national debt – will likely lead to further slowdown.
IMF projected Japan’s growth to clock 1.4% this year which is a reduced number from the previous projection of 1.7%. Growth is also expected to decelerate further to 1% in 2015. As a result, analysts and portfolio managers turned increasingly bearish on Japan which lifted the demand for Japan-based bear fund – JPNS.
Launched in June 2103, JPNS looks to give thrice the inverse exposure of the MSCI Japan Index on a daily basis. The product so far has amassed about $3.0 million in assets and trades in a volume of about 4,000 shares a day.
JPNS is a reasonable choice in the inverse equities ETF space charging 95 bps a year. Since the underlying sector is heavy on Consumer Discretionary, Financials and Industrials, JPNS can be tagged as the contrary image of these sectors in Japan.
JPNS gained about 15% in the last week (as of April 10, 2014) while the year-to-date performance was even greater at 31% (read: Short Japan with these Inverse ETFs).
RUSS Daily Russia Bear 3x Shares ETF (RUSS)
Russia has been the most talked about investment destination since the start of this year owing to its issues with Ukraine followed by its invasion in Crimea which was earlier a Ukrainian territory. This sortie was viewed as the utter violation of international law by the West. As a protest of Russian act, the U.S. and the European Union imposed some travel bans and asset freezes on Russian diplomats (read: Is It Time to Flee Russian ETFs?).
While the situation was fuming in the initial phase of the year, some of Putin’s dovish comments like there will be no further maneuver in Ukraine put this heightened geo-political tension to rest. But the tension again flared up of late when pro-Russia displays in the Ukraine turned aggressive. This has provoked qualms that Russia might replicate its Crimea Annexation act in eastern Ukraine which in turn goaded gains in Russian bearish funds (read: 4 Leveraged/Inverse ETFs Soaring in 2014).
RUSS is also a triple leverage inverse equity fund of Russia. Direxion launched this fund in May 2011. The fund has so far generated $18.6 million in assets and trades in a volume of 300,000 shares a day. RUSS charges 95 bps in fees.
RUSS lost 4.38% last week though the fund gained 57% this year.
While smart returns provided by the aforementioned ETFs can entice any investor, we would like to note as a word of caution that bear ETFs are only appropriate for active investors who can manage their portfolio on a daily basis. Zacks does not rank inverse and leveraged ETFs in view of their short-term performance objectives, but clearly the few outlined above have benefited from recent trends in the market.
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Read the analyst report on TZA
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