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7 Inverse ETFs Riding High on Nasdaq Sell-Off

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The tech-heavy Nasdaq Composite Index resumed its decline with the index plunging 2.6% on the May 10 trading session to post its worst day since March. The selling pressure were created by a sell-off in the technology sector, especially in the big tech titans (read: Best ETFs to Invest in Big Tech).

This is especially true, as the ongoing economic recovery post pandemic has led to a surge in prices for broad-based commodities, sparking fears of inflation. This could prompt the Federal Reserve to tighten policies earlier than expected, dampening the appeal for stocks, which rely on easy borrowing for superior growth and whose valuations depend heavily on future earnings. As such, investors are rotating out of the technology names to the sectors poised to benefit from the recovering economy.

Market Impact

Semiconductor stocks were at the forefront of the Nasdaq’s heavy decline with Align Technology (ALGN - Free Report) , Lam Research (LRCX - Free Report) , Qorvo (QRVO - Free Report) and Qualcomm (QCOM - Free Report) falling more than 6%. Big tech stocks like Facebook (FB - Free Report) lost more than 4%, while Amazon (AMZN - Free Report) and Netflix (NFLX - Free Report) dropped over 3% each. Alphabet (GOOGL - Free Report) slid more than 2%.

The sell-off has resulted in a spike in inverse or inverse leveraged ETFs. These products either create a short position or a leveraged short position in the underlying index through the use of swaps, options, future contracts and other financial instruments. Due to their compounding effect, investors can enjoy higher returns in a short period of time, provided the trend remains a friend (see: all the Inverse Equity ETFs here).

However, these funds run the risk of huge losses compared with the traditional ones in fluctuating or seesawing markets. Further, their performance could vary significantly from the actual performance of the underlying index over the longer period compared to a shorter period (such as, weeks or months).

We have highlighted seven inverse ETFs that benefited the most from the Nasdaq sell-off on the day:

Direxion Daily Semiconductor Bear 3x Shares SOXS – Up 13.9%

This ETF provides three times inverse exposure to the PHLX Semiconductor Sector Index. It charges 0.95% in annual fees and trades in an average daily volume of 9.1 million shares. It manages $76 million in its asset base (read: 5 Best Inverse/Leveraged ETF Areas of Last Week).

Direxion Daily S&P Biotech Bear 3x Shares (LABD - Free Report) – Up 10.9%

This product seeks to deliver three times the inverse daily performance of the S&P Biotechnology Select Industry Index. The fund has amassed $51.9 million in its asset base and has an average daily volume of more than 3.8 million shares. It charges investors 95 bps in annual fees and expenses.

BMO REX MicroSectors FANG+ Index -3X Inverse Leveraged ETN FNGD – Up 10.9%

This note seeks to offer three times inverse leveraged exposure to the NYSE FANG+ Index, which is an equal-dollar weighted index targeting the highly-traded growth stocks of next-generation technology and tech-enabled companies in the technology and consumer discretionary sectors. The ETN has accumulated $62.2 million in its asset base. It charges 95 bps in annual fees and trades in an average daily volume of 5.6 million shares.

ProShares UltraShort Semiconductors ETF SSG – Up 8.9%

This fund offers two times inverse exposure to the daily performance of the Dow Jones U.S. Semiconductors Index. It is an unpopular and illiquid choice in the space with AUM of $3.1 million and an average daily volume of around 31,000 shares. Expense ratio comes in at 0.95%.

Direxion Daily Technology Bear 3x Shares (TECS - Free Report) - Up 7.7%

This product provides three times inverse exposure to the daily performance of the Technology Select Sector Index. It has amassed about $59.9 million in its asset base while charging 95 bps in fees per year from investors. Volume is good as it exchanges around 2.5 million shares a day on average.

Direxion Daily Small Cap Bear 3x Shares (TZA - Free Report) – Up 7.7%

This product provides three times inverse exposure to the Russell 2000 Index, charging 95 bps in fees and expenses. It has been able to manage $350.8 million in its asset base with a heavy average daily volume of 40.4 million shares (read: Add These Small-Cap ETFs to Your Portfolio in Q2).

ProShares UltraPro Short QQQ (SQQQ - Free Report) – Up 7.6%
 
This ETF provides three times inverse exposure to the daily performance of the Nasdaq-100 Index, charging 95 bps in annual fees. It has AUM of $1.8 billion and trades in an average daily volume of about 89.7 million shares.

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.

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