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ETFs in Focus on Tug of War Between Bulls and Bears

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Both bull and bear ETFs are showing immense potential as abrupt changes in sentiments have raised the appeal for these products. A bull ETF makes money in an upward market while a bear ETF gains when the market goes down. These products create a long/short position with a leveraged factor (i.e. 2X or 3X) in the underlying index through the use of swaps, options, future contracts and other financial instruments.

Wall Street is caught in a bull-bear tug-of-war lately. This is especially true as bulls are intact with strong support from Fed, euphoria surrounding the COVID-19 vaccine and an improving economic backdrop. Per the latest reports, the University of Oxford and AstraZeneca Plc (AZN - Free Report) resumed the U.K. trial of its COVID-19 vaccine, while Pfizer’s (PFE - Free Report) management said that the vaccine candidate, if proven to be safe and effective by federal regulators, in collaboration to BioNTech could reach Americans before 2020-end.

Additionally, a flurry of deal activity is expected to excite bulls this week. Gilead Sciences (GILD - Free Report) reached a $21 billion deal to acquire Immunomedics (IMMU - Free Report) , Nvidia (NVDA - Free Report) agreed to a $40 billion deal to buy Arm Holdings from Japan's SoftBank, and Oracle (ORCL - Free Report) has reportedly won the bid for TikTok's U.S. operations.

On the other hand, bears are raging on elevated valuation concerns and election uncertainty. Per the Bloomberg report, valuation has emerged as a concern for bulls. At about 26 times annual profits for the S&P 500 and 37 times for the Nasdaq 100, American shares are still trading at the highest multiples in more than a decade despite last week’s selloff. Meanwhile, with less than two months left for the presidential election, former vice-president Joe Biden, the Democratic party’s nominee, is polling ahead of Republican President Donald Trump in key battleground states, according to the one poll tracker.

Additionally, the rise in U.S.-China trade tension and failure in creating a new coronavirus aid package made the bears fiercer. Further, if we go be history, September is historically a weak month for the stock market (read: Beaten-Down ETFs to Buy After Market Rout).

Based on the above discussion, we have highlighted the bull and bear ETFs from the hot zones that have grabbed headlines lately or will likely be on investors’ radar this week.

Technology

The technology sector underperformed last week with the S&P 500 tech sector losing 4.4%, representing its biggest one-week loss since March. Given this, BMO REX MicroSectors FANG+ Index -3X Inverse Leveraged ETN FNGD, Direxion Daily Technology Bear 3x Shares (TECS - Free Report) and Daily Dow Jones Internet Bear 3X Shares WEBS plunged in double digits last week (read: 5 Inverse Tech ETFs Jump on Fastest-Ever Nasdaq Correction).

FNGD seeks to offer three times inverse leveraged exposure to the NYSE FANG+ Index while WEBS provides three times inverse play on the Internet corner of the broad technology. TECS provides three times inverse exposure to the daily performance of the Technology Select Sector Index.

However, the trend is likely to reverse with the ongoing stay-at-home trends. The global digital shift that has accelerated e-commerce for everything ranging from remote working to entertainment, and shopping that will drive the sector, giving a boost to bull tech ETFs like BMO REX MicroSectors FANG+ Index 3X Leveraged ETN FNGU, Direxion Daily Technology Bull 3X Shares (TECL - Free Report) and Daily Dow Jones Internet Bull 3X Shares WEBL (read: Should You Buy or Fear the Dips in Technology ETFs?).

Nasdaq

The tech-heavy Nasdaq Composite Index logged in its worst week since March, shedding 4.1%. As such, ProShares UltraPro Short QQQ (SQQQ - Free Report) , which offers three times inverse exposure to the daily performance of the Nasdaq-100 Index, jumped 12.6% while ProShares UltraShort QQQ (QID - Free Report) , which offers two times inverse exposure to the daily performance of the Nasdaq-100 Index, was up 8.6%. Per Bloomberg, traders poured nearly $600 million into TQQQ on Sep 10.

However, with the latest development on vaccine and new deal activities, Nasdaq is likely to move higher and thus bull Nasdaq ETFs will be on radar.

Small-Caps

Although small-cap bear ETFs like Direxion Daily Small Cap Bear 3X Shares (TZA - Free Report) and ProShares Ultra Short Small Cap 600 SDD showed strength last week on a tech-led market rout, bulls are likely to take charge on recovering economy and vaccine hopes. This is because the small-cap stocks generally outperform on improving American economic health as these are closely tied to the U.S. economy and do not have much exposure to the international market. Additionally, these pint-sized stocks are shielded from geopolitical risks as election approaches, tensions with China rise and Britain’s plan to exit the European Union grows more complicated (read: Are Smaller-Cap ETFs Good Bet for September?).

Cyclical Sectors

As valuations have become lofty, investors are looking into opportunities in the beaten-down cyclical sectors, which are closely tied to economic activities. When growth improves, these sectors perform well. Direxion Daily Homebuilders & Supplies Bull 3X Shares (NAIL - Free Report) and Direxion Daily Transportation Bull 3X Shares TPOR were up 11.1% and 2.1%, respectively. The trend seems to continue in the week ahead on a spate of positive news.

A Note of Caution!

While the bull and bear ETFs are highly beneficial for short-term traders, these could lead to huge losses compared to 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.

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