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S&P 500 to Drop Further: Go Short With These ETFs

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Wall Street has been hit badly by the escalating tension between Moscow and the West over Ukraine. All the major indices plunged, with the S&P 500 falling deeper into correction territory and Nasdaq 100 approaching the first bear market in nearly two years. The Fed tightening policy is also weighing on investors’ sentiment.

The bearish trend is likely to continue with some analysts expecting bigger drops. In fact, investors are betting against the market surge. Short sellers are adding to their positions against the SPDR S&P 500 ETF Trust (SPY - Free Report) , which tracks the broad U.S. stock index, at the fastest rate in nearly a year. Other investors are buying options contracts at a record pace that would pay out if the recent declines in the stock worsen (read: 5 Inverse ETFs to Tap Worsening Russia-Ukraine Tension).

To tap this trend, investors could easily go short on the S&P 500 Index at least in the near term with the help of inverse or leveraged inverse ETFs that offer inverse (opposite) exposure to the index. ProShares Short S&P500 ETF (SH - Free Report) , Direxion Daily S&P 500 Bear 1X Shares (SPDN - Free Report) , ProShares UltraShort S&P500 ETF (SDS - Free Report) , ProShares UltraPro Short S&P500 (SPXU - Free Report) and Direxion Daily S&P 500 Bear 3x Shares (SPXS - Free Report) are currently the available choices.

Russia-Ukraine Tension

In the latest development, Russian President Vladimir Putin launched a military attack in eastern Ukraine, which declared a state of emergency. A number of Western countries increased sanctions against Russia. The Biden administration is planning to impose technology export bans on Russia, among other penalties, if there is a "further invasion" of Ukraine. Biden already imposed the first wave of sanctions against Russia, targeting the country’s elite banks and sovereign debt, and promised more if incursions into Ukraine take place.

Europe will place “massive and targeted” sanctions on Russia over its aggression in Ukraine, aiming at its financial sector, freezing Russia assets and banning the export of technology to Russia. The United Kingdom has started imposing economic sanctions against five Russian banks and three wealthy individuals. Germany halted a major gas pipeline project, Nord Stream 2, in Russia.

Tightening Policy

The stock market was already under pressure due to the possible aggressive tightening by the Federal Reserve to combat inflation. The Fed is planning to raise interest rates for the first time in more than three years to combat the skyrocketing inflation. The consumer price index jumped 7.5% year over year in January, marking the biggest 12-month gain since February 1982. The high inflation has set the stage for the first interest rate hike as soon as March. Wall Street analysts are predicting as many as seven rate hikes this year.

Per CME’s FedWatch tool, traders now see only a 9.5% chance of the U.S. central bank hiking rates by 50 basis points as against 45% probability only a week ago. The probability of a 25-basis point Fed rate hike spiked to 90.5% on Feb 24 from 54.7% a week ago, reflecting a shift in traders' perception, given the geopolitical uncertainty.

ETFs to Bet On

ProShares Short S&P500 ETF (SH - Free Report)

ProShares Short S&P500 ETF provides unleveraged inverse exposure to the daily performance of the S&P 500 index. It is the most popular and liquid ETF in the inverse equity space with AUM of $1.8 billion and average daily volume of 20.6 million shares. ProShares Short S&P500 ETF charges 88 bps in annual fees.

Direxion Daily S&P 500 Bear 1X Shares (SPDN - Free Report)

Direxion Daily S&P 500 Bear 1X Shares also offers unleveraged inverse exposure to the daily performance of the S&P 500 Index. It has accumulated $254.4 million in its asset base while trading in an average daily volume of 1.5 million shares. Direxion Daily S&P 500 Bear 1X Shares is cheap relative to other inverse products as it charges just 45 bps in annual fees.

ProShares UltraShort S&P500 ETF (SDS - Free Report)

ProShares UltraShort S&P500 ETF seeks two times (2x) leveraged inverse exposure to the index, charging 90 bps in fees. It is also relatively popular and liquid having amassed nearly $700.9 million in AUM and more than 8 million shares in average daily volume (read: Russia-Ukraine Tensions Flare Up: ETF Strategies to Win).

ProShares UltraPro Short S&P500 (SPXU - Free Report)

Investors having a more bearish view and higher risk appetite could find SPXU interesting as the fund provides three times (3x) inverse exposure to the index. The ETF charges a fee of 90 bps per year. Trading volume is solid, exchanging around 21.3 million shares per day on average. It has amassed $578.1 million in its asset base.

Direxion Daily S&P 500 Bear 3x Shares (SPXS - Free Report)

Like SPXU, this product also provides three times inverse exposure to the index but comes with 5 bps higher fees. It trades in a solid volume of about 15 million shares and has AUM of $417.3 million.

Bottom Line

While the strategy is highly beneficial for short-term traders, it could lead to huge losses compared with traditional funds in fluctuating or seesawing markets. Further, their performances could vary significantly from the actual performance of their underlying index over a longer period when compared to the shorter period (such as weeks or months) due to their compounding effect (see: all the Inverse Equity ETFs here).

Still, for ETF investors 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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