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5 Inverse ETFs Jump Most on Market Sell-Off

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Wall Street saw dismal trading on Sep 28 as U.S. Treasury yields rose. The yield on the 10-year Treasury jumped to top 1.54%, reaching its highest level since June. The prospect of tightening policies as well as inflation fears drove the yields higher.  

U.S. Federal Reserve policymakers last week projected that they are ready to raise rates in 2022 and that the bank is likely to begin reducing its monthly bond purchases as soon as November. Meanwhile, Powell warned of higher inflation that will likely remain in the coming months. He said, “As the economy continues to reopen and spending rebounds, we are seeing upward pressure on prices, particularly due to supply bottlenecks in some sectors.”

The Nasdaq Composite index bore most of the brunt, with growth stocks leading the sell-off. Since March, the benchmark saw its worst day dropping 2.8%, while the S&P 500 notched its worst daily fall since May, shedding 2%. Both the indices are headed for their biggest monthly declines since September 2020. The Dow Jones Industrial Average lost 1.6% on the day.
Concerns over slowing economic growth after consumer confidence unexpectedly fell to its lowest since February also took a toll on investors’ sentiment. The Conference Board’s index tumbled for the third consecutive month in September, suggesting that the spread of the Delta variant and higher prices continue to dampen sentiment. Additionally, worries over contentious debt ceiling negotiations in Washington accelerated the broad market sell-off (read: Why You Should Invest in Quality Stocks & ETFs Now).

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, futures 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 to 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 the five best-leveraged inverse ETFs of the day that piled up handsome gains on the broad sell-off, though these involve a great deal of risk compared to the traditional products (see: all the Inverse Equity ETFs here).

Direxion Daily Semiconductor Bear 3x Shares (SOXS - Free Report) – Up 11.8%

This ETF provides three times inverse exposure to the ICE Semiconductor Index. It charges 95 bps in annual fees and trades in an average daily volume of 9.8 million shares. The fund manages $136.5 million in its asset base.

Daily Dow Jones Internet Bear 3X Shares (WEBS - Free Report) – Up 10.1%

This fund provides three times inverse play on the Internet corner of the broad technology sector by tracking the Dow Jones Internet Composite Index. It has attracted $5.2 million in its asset base and charges 95 bps in annual fees. The ETF sees an average daily volume of more than 69,000 shares.

Direxion Daily S&P Biotech Bear 3x Shares (LABD - Free Report) – Up 9.2%

This product seeks to deliver three times the inverse daily performance of the S&P Biotechnology Select Industry Index. The fund has amassed $56.5 million in its asset base and has an average daily volume of about 2.8 million shares. It charges investors 95 bps in annual fees and expenses.

BMO REX MicroSectors FANG+ Index -3X Inverse Leveraged ETN (FNGD - Free Report) – Up 8.4%

This note seeks to offer three times inverse leveraged exposure to the NYSE FANG+ Index, 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 $54.2 million in its asset base. It charges 95 bps in annual fees and trades in an average daily volume of 6 million shares.

ProShares UltraPro Short QQQ (SQQQ - Free Report) – Up 8.4%
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 $1.6 billion and trades in an average daily volume of about 84 million shares. SQQQ charges 95 bps per year (read: 10 Most Heavily Traded ETFs of Third Quarter).

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.

Still, for ETF investors, who are bearish on equities for the near term, either of the above products could make an interesting choice. These could be attractive for those with high-risk tolerance and believe that the “trend is the friend” in this specific corner of the investing world.