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Wall Street Plunges: Make Profits From These Inverse ETFs

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Wall Street has stumbled on rising inflationary pressures with all the three major indices sliding deep in red this week. The Dow Jones and the S&P 500 post their steepest three-day drop in nearly seven months, declining 3.4% and 4%, respectively, while the tech-heavy Nasdaq Composite Index lost 5.2%, representing its worst three days since early March.

The inflation fears intensified following the latest inflation data, which shows the largest increase since 2008. The Consumer Price Index spiked 4.2% from a year ago and 0.8% from the prior month to the highest level in 13-years (read: Inflation Is Picking Up: 5 ETFs to Make the Most of It).

The spike in inflation has made investors jittery, compelling them to dump the growth stocks in particular. This is because rising prices tend to squeeze margins and erode corporate profits for the growth companies, which tend to have higher valuations. If inflation remains high for a sustained period of time, it could trigger earlier-than-expected tightening policies from the Federal Reserve though the central bank views inflation as temporary.

This has resulted in a spike for 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.

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).

Still, investors seeking to make profits from the falling market could bet on the following inverse ETFs:

Direxion Daily Semiconductor Bear 3x Shares (SOXS - Free Report)

The semiconductor corner of the tech sector has been beaten down badly in the current broad market rout given the shortage of chips and production issues. 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 8.7 million shares. The fund manages $88.1 million in its asset base and soared 27.1% so far this week (read: Why Semiconductor ETFs Are Soaring).

BMO REX MicroSectors FANG+ Index -3X Inverse Leveraged ETN (FNGD - Free Report)

As the tech giants have lofty valuations after an astounding surge last year, an inverse play on these stocks through FNGD seems a good idea. 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 $68 million in its asset base. It charges 95 bps in annual fees and trades in an average daily volume of 5.3 million shares. FNGD is up 19% in the same period.

ProShares UltraPro Short QQQ (SQQQ - Free Report)
 

Since the Nasdaq has been the biggest loser from the broad market rout, an inverse bet against the index could be exciting. 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 $1.9 billion and trades in an average daily volume of about 74.3 million shares. SQQQ is up 16.3% over the past three days (read: 7 Inverse ETFs Riding High on Nasdaq Sell-Off).

Daily S&P 500 High Beta Bear 3X Shares (HIBS - Free Report)

HIBS could be a great option to play the sell-off in high beta sector. This ETF offers three times inverse exposure of the performance of the S&P 500 High Beta Index. It has gathered $19.5 million in AUM and trades in an average daily volume 2.1 million shares. The fund charges 95 bps in fees per year from investors and has gained 15% over the past three days.

Direxion Daily Emerging Markets Bear 3X Shares (EDZ - Free Report)

Higher inflation and the resultant surging U.S. yields also took a toll on the emerging markets. As such, EDZ, offering three times inverse exposure to the MSCI Emerging Markets Index, looks like an interesting pick. It charges investors 95 bps in annual fees and has amassed about $21.5 million in its asset base. The fund trades in good volumes of 277,000 shares a day on average and has gained 15.5% so far this week (read: Are Emerging Market ETFs in Trouble?).

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 (see: all the Inverse Equity ETFs here).

Still, for ETF investors, who are bearish on equities for the near term, either of the above products could make an interesting choice. Clearly, these could be attractive 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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