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Wall Street gave a dismal performance last month on Fed’s longer-than-expected rate hike speculation, with all three major indices in red. The Dow Jones lost 4.2%, while the S&P 500 and tech-heavy Nasdaq Composite Index dropped 2.6% and 1.1%, respectively.
This has resulted in huge demand for inverse or inverse-leveraged ETFs as these fetch outsized returns on bearish sentiments in a short span. MicroSectors Gold Miners -3X Inverse Leveraged ETN (GDXD - Free Report) , MicroSectors U.S. Big Oil Index -3X Inverse Leveraged ETN (NRGD - Free Report) , Direxion Daily S&P Biotech Bear 3x Shares (LABD - Free Report) , ProShares UltraPro Short Dow30 (SDOW - Free Report) and ProShares UltraShort Utilities ETF (SDP - Free Report) might continue their strong performance if sentiments remain the same.
Inverse and inverse-leveraged ETFs either create an inverse short position or a leveraged inverse short position in the underlying index through the use of swaps, options, futures contracts and other financial instruments. Due to their compounding effect, investors can enjoy higher returns in a very short time, provided the trend prevails.
Recent rounds of economic data suggest stronger economic activity and have rekindled worries about a longer-than-expected Fed rate hike. U.S. consumer spending increased the most in nearly two years in January, and retail sales also increased the most in nearly two years in January after two straight monthly declines. Hiring surged with the economy adding a solid 517,000 jobs in January. The unemployment rate fell from 3.5% to 3.4%, the lowest since 1969. Business activity unexpectedly rebounded in February, reaching its highest level in eight months (read: Higher Spending to Boost Consumer Discretionary ETFs).
The housing market is showing signs of improvement. U.S. builder confidence has risen for the second consecutive month to the highest level since September 2022. Signed contracts to buy existing homes in the United States rose the most since June 2020 in January.
Inflation has also come in hotter than expected. The Federal Reserve’s preferred inflation gauge accelerated in January at its fastest pace since June, an alarming sign that price pressures remain entrenched in the U.S. economy and could lead the Fed to keep raising interest rates well into this year. Earlier this month, per the government report, the consumer price index jumped 0.5% in January following a 0.1% increase in December. It climbed 6.4% year over year, down from a peak of 9.1% in June but far above the Fed’s 2% inflation target.
All these have pushed the yields higher. Notably, 10-year Treasury yields surged the most since September.
In the commodity world, gold and silver wrapped up their worst monthly performances in more than a year. The yellow metal declined 5.6% in February, marking the worst month since June 2021, while the grey metal had its worst month since 2020, ending the month down 11.6%.
MicroSectors Gold Miners -3X Inverse Leveraged ETN seeks to offer three times inverse leveraged exposure to the S-Network MicroSectors Gold Miners Index.
MicroSectors Gold Miners -3X Inverse Leveraged ETN has accumulated $43 million in its asset base and trades in an average daily volume of 704,000 shares. It charges 95 bps in annual fees.
MicroSectors U.S. Big Oil Index -3X Inverse Leveraged ETN (NRGD - Free Report) – Up 35%
MicroSectors U.S. Big Oil Index -3X Inverse Leveraged ETN offers three times inverse exposure to the Solactive MicroSectors U.S. Big Oil Index, which is equal-dollar weighted and provides exposure to the 10 largest U.S. energy and oil companies (read: Can Oil ETFs Jump in 2023 After a Low Start?).
MicroSectors U.S. Big Oil Index -3X Inverse Leveraged ETN has accumulated $175.2 million in its asset base. It charges 95 bps in annual fees and trades in an average daily volume of about 1.6 million shares.
Direxion Daily S&P Biotech Bear 3x Shares seeks to deliver three times the inverse daily performance of the S&P Biotechnology Select Industry Index, which includes domestic companies from the biotechnology industry.
Direxion Daily S&P Biotech Bear 3x Shares has amassed $130 million in its asset base and has an average daily volume of around 10 million shares. LABD charges investors 94 bps in annual fees.
ProShares UltraPro Short Dow30 (SDOW - Free Report) – Up 12.5%
ProShares UltraPro Short Dow30 has AUM of $788.2 million and trades in an average daily volume of about 9.8 million shares. It charges 95 bps per year.
ProShares UltraShort Utilities ETF seeks to deliver twice (2X or 200%) the inverse return of the daily performance of the Dow Jones U.S. Utilities Index. It has $2.8 million in AUM and an average trading volume of nearly 19,000 shares per day.
ProShares UltraShort Utilities ETF charges 95 bps in fees per year from investors.
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 compared to a 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 a high-risk tolerance and a belief that the “trend is the friend” in this specific corner of the investing world.
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5 Best Inverse-Leveraged ETFs of February
Wall Street gave a dismal performance last month on Fed’s longer-than-expected rate hike speculation, with all three major indices in red. The Dow Jones lost 4.2%, while the S&P 500 and tech-heavy Nasdaq Composite Index dropped 2.6% and 1.1%, respectively.
This has resulted in huge demand for inverse or inverse-leveraged ETFs as these fetch outsized returns on bearish sentiments in a short span. MicroSectors Gold Miners -3X Inverse Leveraged ETN (GDXD - Free Report) , MicroSectors U.S. Big Oil Index -3X Inverse Leveraged ETN (NRGD - Free Report) , Direxion Daily S&P Biotech Bear 3x Shares (LABD - Free Report) , ProShares UltraPro Short Dow30 (SDOW - Free Report) and ProShares UltraShort Utilities ETF (SDP - Free Report) might continue their strong performance if sentiments remain the same.
Inverse and inverse-leveraged ETFs either create an inverse short position or a leveraged inverse short position in the underlying index through the use of swaps, options, futures contracts and other financial instruments. Due to their compounding effect, investors can enjoy higher returns in a very short time, provided the trend prevails.
Recent rounds of economic data suggest stronger economic activity and have rekindled worries about a longer-than-expected Fed rate hike. U.S. consumer spending increased the most in nearly two years in January, and retail sales also increased the most in nearly two years in January after two straight monthly declines. Hiring surged with the economy adding a solid 517,000 jobs in January. The unemployment rate fell from 3.5% to 3.4%, the lowest since 1969. Business activity unexpectedly rebounded in February, reaching its highest level in eight months (read: Higher Spending to Boost Consumer Discretionary ETFs).
The housing market is showing signs of improvement. U.S. builder confidence has risen for the second consecutive month to the highest level since September 2022. Signed contracts to buy existing homes in the United States rose the most since June 2020 in January.
Inflation has also come in hotter than expected. The Federal Reserve’s preferred inflation gauge accelerated in January at its fastest pace since June, an alarming sign that price pressures remain entrenched in the U.S. economy and could lead the Fed to keep raising interest rates well into this year. Earlier this month, per the government report, the consumer price index jumped 0.5% in January following a 0.1% increase in December. It climbed 6.4% year over year, down from a peak of 9.1% in June but far above the Fed’s 2% inflation target.
All these have pushed the yields higher. Notably, 10-year Treasury yields surged the most since September.
In the commodity world, gold and silver wrapped up their worst monthly performances in more than a year. The yellow metal declined 5.6% in February, marking the worst month since June 2021, while the grey metal had its worst month since 2020, ending the month down 11.6%.
MicroSectors Gold Miners -3X Inverse Leveraged ETN (GDXD - Free Report) – Up 57.3%
MicroSectors Gold Miners -3X Inverse Leveraged ETN seeks to offer three times inverse leveraged exposure to the S-Network MicroSectors Gold Miners Index.
MicroSectors Gold Miners -3X Inverse Leveraged ETN has accumulated $43 million in its asset base and trades in an average daily volume of 704,000 shares. It charges 95 bps in annual fees.
MicroSectors U.S. Big Oil Index -3X Inverse Leveraged ETN (NRGD - Free Report) – Up 35%
MicroSectors U.S. Big Oil Index -3X Inverse Leveraged ETN offers three times inverse exposure to the Solactive MicroSectors U.S. Big Oil Index, which is equal-dollar weighted and provides exposure to the 10 largest U.S. energy and oil companies (read: Can Oil ETFs Jump in 2023 After a Low Start?).
MicroSectors U.S. Big Oil Index -3X Inverse Leveraged ETN has accumulated $175.2 million in its asset base. It charges 95 bps in annual fees and trades in an average daily volume of about 1.6 million shares.
Direxion Daily S&P Biotech Bear 3x Shares (LABD - Free Report) – Up 21.6%
Direxion Daily S&P Biotech Bear 3x Shares seeks to deliver three times the inverse daily performance of the S&P Biotechnology Select Industry Index, which includes domestic companies from the biotechnology industry.
Direxion Daily S&P Biotech Bear 3x Shares has amassed $130 million in its asset base and has an average daily volume of around 10 million shares. LABD charges investors 94 bps in annual fees.
ProShares UltraPro Short Dow30 (SDOW - Free Report) – Up 12.5%
ProShares UltraPro Short Dow30 provides three times inverse exposure to the daily performance of the Dow Jones Industrial Average (read: Dow Turns Red YTD: 5 Stocks in ETF Still in Green).
ProShares UltraPro Short Dow30 has AUM of $788.2 million and trades in an average daily volume of about 9.8 million shares. It charges 95 bps per year.
ProShares UltraShort Utilities ETF (SDP - Free Report) – Up 11.5%
ProShares UltraShort Utilities ETF seeks to deliver twice (2X or 200%) the inverse return of the daily performance of the Dow Jones U.S. Utilities Index. It has $2.8 million in AUM and an average trading volume of nearly 19,000 shares per day.
ProShares UltraShort Utilities ETF charges 95 bps in fees per year from investors.
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 compared to a 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 a high-risk tolerance and a belief that the “trend is the friend” in this specific corner of the investing world.