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Rising Yields Rattles Market: Inverse ETFs in Vogue

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Wall Street resumed its quarter-end decline in the face of rising yields. The yield on 10-year Treasuries climbed to 1.48%, especially resulting in a drop for the big tech and growth names. As such, the tech-heavy Nasdaq Composite Index tumbled the most by 2.2% on Oct 4 to start the week (read: Should You Buy the Dip With These Top-Ranked Tech ETFs?).

This is especially true as the tech sector relies on easy borrowing for superior growth and its value depends heavily on future earnings. Rise in long-term yields lower the present value of companies’ future earnings, sparking fears of overvaluation. Additionally, the Fed is expected to begin scaling back monthly bond purchases as soon as next month, a move that will push the yields even higher, dampening the appeal for growth stocks.

The threat of persistently high inflation added to the chaos. The latest U.S. Fed’s preferred inflation gauge shows the fastest annual rise in inflation since 1991, fueling concerns that price increases will last longer than expected and eventually hit consumer spending.

Further, the regulatory crackdown as well as the potential collapse of the Evergrande property group are weighing on China’s economic growth. The debt-limit debates in Washington also intensified with Democratic and Republican lawmakers still struggling to reach an agreement to raise the federal government borrowing limit. The White House had warned that the failure to reach the debt limit could push the economy into a recession and lead the country to default on its payment obligations.

This 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 five inverse ETFs that benefited the most from the market sell-off on the day:

Daily Dow Jones Internet Bear 3X Shares (WEBS - Free Report) – Up 9.1%

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 $6 million in its asset base and charges 95 bps in annual fees. The ETF sees an average daily volume of more than 65,000 shares.

BMO REX MicroSectors FANG+ Index -3X Inverse Leveraged ETN (FNGD - Free Report) – Up 8.6%

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 $59.4 million in its asset base. It charges 95 bps in annual fees and trades in an average daily volume of 6.3 million shares.

Direxion Daily Semiconductor Bear 3x Shares (SOXS - Free Report) – Up 7.6%

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 10.3 million shares. It manages $122.3 million in its asset base (read: Here's Why Semiconductor ETFs Are Looking Attractive for Q4).

Direxion Daily Technology Bear 3x Shares (TECS - Free Report) - Up 7.2%

This product provides three times inverse exposure to the daily performance of the Technology Select Sector Index. It has amassed about $71.8 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 S&P Biotech Bear 3x Shares (LABD - Free Report) – Up 6.9%

This product seeks to deliver three times the inverse daily performance of the S&P Biotechnology Select Industry Index. The fund has amassed $59 million in its asset base and has an average daily volume of more than 2.8 million shares. It charges investors 95 bps in annual fees and expenses (read: Take a Look at the Top-Performing Biotech ETFs YTD).

Bottom Line

While the strategy is highly beneficial for short-term traders, it could lead to huge losses compared with the traditional funds in fluctuating markets.