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Profit From the Tech Sell-Off With These Inverse ETFs

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The technology sector was off to its worst start since the 2008 financial crisis due to inflationary pressure and Fed’s hawkish tone. The latest Fed minutes revealed quicker-than-expected rate hikes this year, which further ignited sell-off in the sector.

This has resulted in higher demand for inverse or inverse leveraged tech ETFs as these fetch outsized returns on quick market turns in a short span. Direxion Daily Cloud Computing Bear 2X Shares (CLDS - Free Report) , Daily Dow Jones Internet Bear 3X Shares (WEBS - Free Report) , ProShares UltraShort Technology (REW - Free Report) , ProShares UltraPro Short QQQ (SQQQ - Free Report) and Direxion Daily Technology Bear 3x Shares (TECS - Free Report) have gained at the start the year and will likely continue  to do so provided the trend remains a friend (see: all the Inverse Equity ETFs here).

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.

A Pain for Tech

The tech sector relies on easy borrowing for superior growth and its value depends heavily on future earnings. A rise in long-term yields lowers the present value of companies’ future earnings, sparking fears of overvaluation. Additionally, the Fed is expected to increase the pace of scaling back monthly bond purchases this month, a move that will push the yields even higher, dampening the appeal for growth stocks.

In the latest Fed minutes, policymakers showed their concern about worsening inflation and signaled three rate increases this year and three in the following year to combat this fear. The probabilities of a March interest rate hike of 0.25% surged to 72%, according to fed futures trading contracts high (read: Treasury Yields Jump to Start New Year: ETFs to Play).

The central bank plans to buy $60 billion per month of bonds in combined Treasuries and agency mortgage-backed securities starting in January, down from $90 billion in December and 120 billion from the start of the pandemic through November.

We have highlighted the ETFs in detail below:

Direxion Daily Cloud Computing Bear 2X Shares (CLDS - Free Report) - Up 7.5%

Direxion Daily Cloud Computing Bear 2X Shares targets the cloud-computing segment of the broad technology sector, offering two times inverse exposure to the performance of the Indxx USA Cloud Computing Index.

With AUM of $16.2 million, Direxion Daily Cloud Computing Bear 2X Shares has an expense ratio of 0.95% and trades in an average daily volume of 3,000 shares.

Daily Dow Jones Internet Bear 3X Shares (WEBS - Free Report) – Up 5.7%

Daily Dow Jones Internet Bear 3X Shares provides three times inverse play on the Internet corner of the broad technology sector by tracking the Dow Jones Internet Composite Index.

Daily Dow Jones Internet Bear 3X Shares has attracted $4.6 million in its asset base and charges 95 bps in annual fees. The ETF sees an average daily volume of about 53,000 shares.

ProShares UltraShort Technology (REW - Free Report) – Up 1%

ProShares UltraShort Technology offers two times the inverse of the daily performance of the Dow Jones U.S. Technology Index, which measures the performance of the companies including those involved in computers and office equipment, software, communications technology, semiconductors, diversified technology services and Internet services.

ProShares UltraShort Technology has accumulated $3.3 million in its asset base and charges 95 bps in annual fees. It trades in an average daily volume of nearly 26,000 shares.

ProShares UltraPro Short QQQ (SQQQ - Free Report) – Up 0.5%
 
ProShares UltraPro Short QQQ provides three times inverse exposure to the daily performance of the Nasdaq-100 Index, which measures the performance of the largest domestic and international non-financial companies listed on the Nasdaq (read: 5 Most-Heavily Traded ETFs of Fourth Quarter).

ProShares UltraPro Short QQQ has AUM of $1.4 billion and trades in a heavy daily volume of about 145 million shares on average. SQQQ charges 95 bps per year.

Direxion Daily Technology Bear 3x Shares (TECS - Free Report) - Up 0.2%

Direxion Daily Technology Bear 3x Shares provides three times inverse exposure to the daily performance of the Technology Select Sector Index.

Direxion Daily Technology Bear 3x Shares has amassed about $44.9 million in its asset base while charging 95 bps in fees per year from investors. Volume is solid as it exchanges around 2.9 million shares a day on average (read: Rising Yields Rattles Market: Inverse ETFs in Vogue).

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. Due to their compounding effect, investors can enjoy higher returns in a short period of time, provided the trend remains a friend.

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).