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Inverse ETFs to Bet on S&P 500 Decline Expectation
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Wall Street has been caught in a vicious circle of trading lately trigerred by the war in Ukraine. Inflationary pressures and Fed’s rate hike bets have added to the chaos. The combination has pushed the S&P 500 into correction territory. The benchmark is down 11.8% so far this year and is expected to continue its downtrend at least in the near term till the Russia-Ukraine crisis does not end.
Investors seeking to tap this trend could easily go short on the S&P 500 Index with the help of inverse or leveraged inverse ETFs that offer inverse (opposite) exposure to the index. ProShares Short S&P500 ETF ((SH - Free Report) , Direxion Daily S&P 500 Bear 1X Shares (SPDN - Free Report) , ProShares UltraShort S&P500 ETF (SDS - Free Report) , ProShares UltraPro Short S&P500 (SPXU - Free Report) and Direxion Daily S&P 500 Bear 3x Shares (SPXS - Free Report) are currently the available choices.
The biggest risk to the S&P 500 is the worsening Russia-Ukraine crisis that has pushed up commodity prices, adding to inflationary pressures. Inflation skyrocketed to a 40-year high and in turn is weighing on consumer demand and economic growth. U.S. consumer sentiment dropped to an 11-year low in early March.
The central bank is expected to tighten monetary policy in its FOMC meeting this week. Fed Chair Jerome Powell proposed a quarter-point hike instead of a half-point indicating uncertainty related to the ongoing war. But he could move “more aggressively” if the four-decade inflation does not abate substantially. Powell called the labor market “extremely tight” and said inflation has risen well above the Fed’s 2% target (read: Fed Rate Hike to Bring These ETF Areas to the Forefront).
The combination of factors has set the stage for the S&P 500 Index to decline further. The index is expected to drop to 4,000 by the end of 2022 — a fall of about 8% from current levels — according to Yardeni Research, which last month had a target of 4,800. Goldman Sachs Group lowered its target for the S&P 500 Index for the second time in a month to 4,700 from 4,900 previously.
ProShares Short S&P500 ETF provides unleveraged inverse exposure to the daily performance of the S&P 500 Index. It is the most popular and liquid ETF in the inverse equity space with AUM of $2.2 billion and an average daily volume of 23.2 million shares. ProShares Short S&P500 ETF charges 88 bps in annual fees.
Direxion Daily S&P 500 Bear 1X Shares also offers unleveraged inverse exposure to the daily performance of the S&P 500 Index. It has accumulated $274.5 million in its asset base while trading at an average daily volume of 2.4 million shares. Direxion Daily S&P 500 Bear 1X Shares is cheap relative to the other inverse products as it charges just 45 bps in annual fees.
ProShares UltraShort S&P500 ETF seeks two times (2X) leveraged inverse exposure to the index, charging 90 bps in fees. It is also relatively popular and liquid having amassed nearly $781.4 million in AUM and about 12.3 million shares in average daily volume (read: 5 Defensive ETF Bets to Tackle the Current Market Carnage).
Investors having a more bearish view and higher risk appetite could find SPXU interesting as the fund provides three times (3X) inverse exposure to the index. The ETF charges a fee of 90 bps per year. Trading volume is solid, exchanging around 28 million shares per day on average. It has amassed $619.3 million in its asset base.
Like SPXU, this product also provides three times inverse exposure to the index but comes with 5 bps higher fees. It trades in a solid volume of about 20 million shares and has AUM of $435.8 million.
Bottom Line
While the strategy is highly beneficial for short-term traders, it could lead to huge losses compared with traditional funds in fluctuating or seesawing markets. Further, their performances could vary significantly from the actual performance of their underlying index over a longer period when compared to the shorter period (such as weeks or months) due to their compounding effect (see: all the Inverse Equity ETFs here).
Still, for ETF investors bearish on equities for the near term, either of the above products could make an interesting choice. Clearly, these could be intriguing for those with a high risk tolerance, and a belief that the “trend is the friend” in this specific corner of the investing world.
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Inverse ETFs to Bet on S&P 500 Decline Expectation
Wall Street has been caught in a vicious circle of trading lately trigerred by the war in Ukraine. Inflationary pressures and Fed’s rate hike bets have added to the chaos. The combination has pushed the S&P 500 into correction territory. The benchmark is down 11.8% so far this year and is expected to continue its downtrend at least in the near term till the Russia-Ukraine crisis does not end.
Investors seeking to tap this trend could easily go short on the S&P 500 Index with the help of inverse or leveraged inverse ETFs that offer inverse (opposite) exposure to the index. ProShares Short S&P500 ETF ((SH - Free Report) , Direxion Daily S&P 500 Bear 1X Shares (SPDN - Free Report) , ProShares UltraShort S&P500 ETF (SDS - Free Report) , ProShares UltraPro Short S&P500 (SPXU - Free Report) and Direxion Daily S&P 500 Bear 3x Shares (SPXS - Free Report) are currently the available choices.
The biggest risk to the S&P 500 is the worsening Russia-Ukraine crisis that has pushed up commodity prices, adding to inflationary pressures. Inflation skyrocketed to a 40-year high and in turn is weighing on consumer demand and economic growth. U.S. consumer sentiment dropped to an 11-year low in early March.
The central bank is expected to tighten monetary policy in its FOMC meeting this week. Fed Chair Jerome Powell proposed a quarter-point hike instead of a half-point indicating uncertainty related to the ongoing war. But he could move “more aggressively” if the four-decade inflation does not abate substantially. Powell called the labor market “extremely tight” and said inflation has risen well above the Fed’s 2% target (read: Fed Rate Hike to Bring These ETF Areas to the Forefront).
The combination of factors has set the stage for the S&P 500 Index to decline further. The index is expected to drop to 4,000 by the end of 2022 — a fall of about 8% from current levels — according to Yardeni Research, which last month had a target of 4,800. Goldman Sachs Group lowered its target for the S&P 500 Index for the second time in a month to 4,700 from 4,900 previously.
ETFs to Bet On
ProShares Short S&P500 ETF (SH - Free Report)
ProShares Short S&P500 ETF provides unleveraged inverse exposure to the daily performance of the S&P 500 Index. It is the most popular and liquid ETF in the inverse equity space with AUM of $2.2 billion and an average daily volume of 23.2 million shares. ProShares Short S&P500 ETF charges 88 bps in annual fees.
Direxion Daily S&P 500 Bear 1X Shares (SPDN - Free Report)
Direxion Daily S&P 500 Bear 1X Shares also offers unleveraged inverse exposure to the daily performance of the S&P 500 Index. It has accumulated $274.5 million in its asset base while trading at an average daily volume of 2.4 million shares. Direxion Daily S&P 500 Bear 1X Shares is cheap relative to the other inverse products as it charges just 45 bps in annual fees.
ProShares UltraShort S&P500 ETF (SDS - Free Report)
ProShares UltraShort S&P500 ETF seeks two times (2X) leveraged inverse exposure to the index, charging 90 bps in fees. It is also relatively popular and liquid having amassed nearly $781.4 million in AUM and about 12.3 million shares in average daily volume (read: 5 Defensive ETF Bets to Tackle the Current Market Carnage).
ProShares UltraPro Short S&P500 (SPXU - Free Report)
Investors having a more bearish view and higher risk appetite could find SPXU interesting as the fund provides three times (3X) inverse exposure to the index. The ETF charges a fee of 90 bps per year. Trading volume is solid, exchanging around 28 million shares per day on average. It has amassed $619.3 million in its asset base.
Direxion Daily S&P 500 Bear 3x Shares (SPXS - Free Report)
Like SPXU, this product also provides three times inverse exposure to the index but comes with 5 bps higher fees. It trades in a solid volume of about 20 million shares and has AUM of $435.8 million.
Bottom Line
While the strategy is highly beneficial for short-term traders, it could lead to huge losses compared with traditional funds in fluctuating or seesawing markets. Further, their performances could vary significantly from the actual performance of their underlying index over a longer period when compared to the shorter period (such as weeks or months) due to their compounding effect (see: all the Inverse Equity ETFs here).
Still, for ETF investors bearish on equities for the near term, either of the above products could make an interesting choice. Clearly, these could be intriguing for those with a high risk tolerance, and a belief that the “trend is the friend” in this specific corner of the investing world.