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Rate Hikes to Weigh on Nasdaq: Go Short With These ETFs

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The tech-heavy Nasdaq Composite Index has been struggling to hold gains this year. This is especially true as rising yields are weighing heavily on the high-growth technology stocks. The rout accelerated after the historic drop in Facebook-parent Meta Platforms shares  due to its disappointing quarterly earnings (read: Meta Platforms Sinks Post Dismal Q4 Earnings: ETFs in Focus).

As such, the Nasdaq Composite Index dropped 3.7% on Feb 3, marking its worst day since September 2020. With this, the benchmark is down 11.3%. This has raised the appeal for inverse or inverse leveraged Nasdaq ETFs as these fetch outsized returns on the quick market turns in a short span. Investors could easily profit from three ETFs currently available in the space — ProShares UltraPro Short QQQ (SQQQ - Free Report) , ProShares UltraShort QQQ (QID - Free Report) and ProShares Short QQQ (PSQ - Free Report) .

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.

Why Go Short?

The technology 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. Notably, the 10-year U.S. Treasury yield is hovering around 1.83%.

In the latest FOMC meeting, Fed Chair Jerome Powell, stated that "the economy no longer needs sustained high levels of monetary policy support," and that "it will soon be appropriate to raise rates for the first time in more than three years.” The consumer price index jumped 7% year over year in 2021, the largest 12-month gain since June 1982. The red-hot inflation has set the stage for the first interest rate hike as soon as in March (read: Guide to Interest Rates Hikes and ETFs: 5 Ways to Play).

Wall Street analysts are predicting as many as seven rate hikes this year. Goldman Sachs sees five rate hikes, versus four previously, with the first increase in March while Bank of America projects seven rate hikes this year. According to the CME FedWatch tool, the market is pricing in five interest rate hikes for 2022, with a sixth one starting to gain traction for later in the year.

Below we highlight the inverse Nasdaq ETFs and some of the key differences among them:

ProShares UltraPro Short QQQ (SQQQ - Free Report)
 
ProShares UltraPro Short QQQ provides three times inverse exposure to the daily performance of the Nasdaq-100 Index, charging 95 bps in annual fees.

ProShares UltraPro Short QQQ has AUM of $2.1 billion and trades in an average daily volume of about 45.6 million shares. SQQQ is up 20.2% so far this year (read: Nasdaq in Correction: ETF Strategies to Play).

ProShares UltraShort QQQ (QID - Free Report)

ProShares UltraShort QQQ provides two times inverse exposure to the Nasdaq-100 Index. It also charges 0.95% in annual fees and trades in an average daily volume of 21.2 million shares.

ProShares UltraShort QQQ manages $278.5 million in its asset base and has surged 13.9% this year.

ProShares Short QQQ (PSQ - Free Report)

ProShares Short QQQ offers inverse exposure to the daily performance of the Nasdaq-100 Index. It has amassed $826.9 million in its asset base and trades in an average daily volume of 18.3 million shares.

ProShares Short QQQ charges 95 bps per year and has gained 7% so far this year.

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 (see: all the Inverse Equity ETFs here).

Further, their performance could vary significantly from the actual performance of the underlying index over a longer period compared to a shorter period (such as weeks or months).


In-Depth Zacks Research for the Tickers Above


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Proshares Short QQQ (PSQ) - free report >>

ProShares UltraPro Short QQQ (SQQQ) - free report >>

ProShares UltraShort QQQ (QID) - free report >>