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After notching the biggest rally in two years on Fed’s biggest interest rate hike in 22 years, Wall Street faltered on the May 5 trading session. This is especially true as the investors grew concerned about the impact of the higher rates on the economy and business as well as the uncertainty over how the Federal Reserve's actions will tame inflation without causing a recession.
The market sell-off has resulted in higher demand for inverse or inverse-leveraged ETFs as these fetch outsized returns on bearish sentiments in a short span. Daily Dow Jones Internet Bear 3X Shares (WEBS - Free Report) , BMO REX MicroSectors FANG+ Index -3X Inverse Leveraged ETN (FNGD - Free Report) , Direxion Daily S&P Biotech Bear 3x Shares (LABD - Free Report) , ProShares UltraPro Short QQQ (SQQQ - Free Report) and Direxion Daily Technology Bear 3x Shares (TECS - Free Report) outperformed on the May 5 session and might continue their strong performance if sentiments remain the same.
Inverse and inverse-leveraged ETFs either create an inverse short position or a leveraged inverse 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 very short time, provided the trend prevails.
The S&P 500 dropped 3.6%, erasing about $1.3 trillion of market value and marking the second-worst day of the year. The Dow Jones Industrial dropped more than 1,000 points and the tech-heavy Nasdaq Composite Index fell nearly 5%. Both indexes notched their worst single-day drops since 2020 (read: Should You Short Nasdaq ETFs as Index Hits New Low for 2022?).
Along with Fed uncertainty, the ongoing Russia-Ukraine war and surging commodity prices continued to weigh on investors’ sentiment. Notably, the U.S. economy shrank for the first time since the outbreak of the pandemic. GDP dropped 1.4% annually in the first quarter of 2022, marking a sharp reversal from 6.9% annual growth in the fourth quarter.
The bearish sentiment added tp the weaker-than-expected corporate results for the first quarter. Total earnings for the 370 S&P 500 companies that have reported Q1 results so far are up 7.1% on 14.5% higher revenues, with 81.1% beating EPS estimates and 74.3% beating revenue estimates, per the Earnings Trends report. Though EPS and revenue beat percentages have improved, growth rates are still lower than the last four quarters.
Daily Dow Jones Internet Bear 3X Shares (WEBS - Free Report) – Up 19.7%
Daily Dow Jones Internet Bear 3X Shares provides a 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 $28 million in its asset base and charges 95 bps in annual fees. The ETF sees an average daily volume of about 235,000 shares.
BMO REX MicroSectors FANG+ Index -3X Inverse Leveraged ETN (FNGD - Free Report) – Up 18.7%
BMO REX MicroSectors FANG+ Index -3X Inverse Leveraged ETN 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.
BMO REX MicroSectors FANG+ Index -3X Inverse Leveraged ETN has accumulated $102.4 million in its asset base. It charges 95 bps in annual fees and trades in an average daily volume of 711,000 shares.
Direxion Daily S&P Biotech Bear 3x Shares seeks to deliver three times the inverse daily performance of the S&P Biotechnology Select Industry Index, which includes the domestic companies from the biotechnology industry (read: 5 Inverse ETFs That Are Up More Than 60% in April).
Direxion Daily S&P Biotech Bear 3x Shares has amassed $58.7 million in its asset base and has an average daily volume of around 4 million shares. LABD charges investors 94 bps in annual fees.
ProShares UltraPro Short QQQ (SQQQ - Free Report) - Up 14.7%
ProShares UltraPro Short QQQ provides three times inverse exposure to the daily performance of the Nasdaq-100 Index, charging 95 bps in annual fees. The index measures the performance of the 100 largest domestic and international non-financial companies listed on the Nasdaq Stock Market based on market capitalization.
ProShares UltraPro Short QQQ has AUM of $2.5 billion and trades in an average daily volume of about 93.7 million shares.
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 $102.2 million in its asset base while charging 95 bps in fees per year from investors. Volume is solid as it exchanges around 2 million shares a day on average.
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 compared to a 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 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 Take Flight as Market Turns Sour
After notching the biggest rally in two years on Fed’s biggest interest rate hike in 22 years, Wall Street faltered on the May 5 trading session. This is especially true as the investors grew concerned about the impact of the higher rates on the economy and business as well as the uncertainty over how the Federal Reserve's actions will tame inflation without causing a recession.
The market sell-off has resulted in higher demand for inverse or inverse-leveraged ETFs as these fetch outsized returns on bearish sentiments in a short span. Daily Dow Jones Internet Bear 3X Shares (WEBS - Free Report) , BMO REX MicroSectors FANG+ Index -3X Inverse Leveraged ETN (FNGD - Free Report) , Direxion Daily S&P Biotech Bear 3x Shares (LABD - Free Report) , ProShares UltraPro Short QQQ (SQQQ - Free Report) and Direxion Daily Technology Bear 3x Shares (TECS - Free Report) outperformed on the May 5 session and might continue their strong performance if sentiments remain the same.
Inverse and inverse-leveraged ETFs either create an inverse short position or a leveraged inverse 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 very short time, provided the trend prevails.
The S&P 500 dropped 3.6%, erasing about $1.3 trillion of market value and marking the second-worst day of the year. The Dow Jones Industrial dropped more than 1,000 points and the tech-heavy Nasdaq Composite Index fell nearly 5%. Both indexes notched their worst single-day drops since 2020 (read: Should You Short Nasdaq ETFs as Index Hits New Low for 2022?).
Along with Fed uncertainty, the ongoing Russia-Ukraine war and surging commodity prices continued to weigh on investors’ sentiment. Notably, the U.S. economy shrank for the first time since the outbreak of the pandemic. GDP dropped 1.4% annually in the first quarter of 2022, marking a sharp reversal from 6.9% annual growth in the fourth quarter.
The bearish sentiment added tp the weaker-than-expected corporate results for the first quarter. Total earnings for the 370 S&P 500 companies that have reported Q1 results so far are up 7.1% on 14.5% higher revenues, with 81.1% beating EPS estimates and 74.3% beating revenue estimates, per the Earnings Trends report. Though EPS and revenue beat percentages have improved, growth rates are still lower than the last four quarters.
Daily Dow Jones Internet Bear 3X Shares (WEBS - Free Report) – Up 19.7%
Daily Dow Jones Internet Bear 3X Shares provides a 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 $28 million in its asset base and charges 95 bps in annual fees. The ETF sees an average daily volume of about 235,000 shares.
BMO REX MicroSectors FANG+ Index -3X Inverse Leveraged ETN (FNGD - Free Report) – Up 18.7%
BMO REX MicroSectors FANG+ Index -3X Inverse Leveraged ETN 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.
BMO REX MicroSectors FANG+ Index -3X Inverse Leveraged ETN has accumulated $102.4 million in its asset base. It charges 95 bps in annual fees and trades in an average daily volume of 711,000 shares.
Direxion Daily S&P Biotech Bear 3x Shares (LABD - Free Report) – Up 18.1%
Direxion Daily S&P Biotech Bear 3x Shares seeks to deliver three times the inverse daily performance of the S&P Biotechnology Select Industry Index, which includes the domestic companies from the biotechnology industry (read: 5 Inverse ETFs That Are Up More Than 60% in April).
Direxion Daily S&P Biotech Bear 3x Shares has amassed $58.7 million in its asset base and has an average daily volume of around 4 million shares. LABD charges investors 94 bps in annual fees.
ProShares UltraPro Short QQQ (SQQQ - Free Report) - Up 14.7%
ProShares UltraPro Short QQQ provides three times inverse exposure to the daily performance of the Nasdaq-100 Index, charging 95 bps in annual fees. The index measures the performance of the 100 largest domestic and international non-financial companies listed on the Nasdaq Stock Market based on market capitalization.
ProShares UltraPro Short QQQ has AUM of $2.5 billion and trades in an average daily volume of about 93.7 million shares.
Direxion Daily Technology Bear 3x Shares (TECS - Free Report) - Up 14.4%
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 $102.2 million in its asset base while charging 95 bps in fees per year from investors. Volume is solid as it exchanges around 2 million shares a day on average.
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 compared to a 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 high-risk tolerance, and a belief that the “trend is the friend” in this specific corner of the investing world.