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5 Inverse ETFs Rallying This Year With Tech Meltdown
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The technology sector saw the worst start to a year since 2002 as the giants were hit hard by soaring yields and the Federal Reserve’s tightening monetary. In fact, big technology stocks are facing their biggest rout in more than a decade. The S&P 500’s information-technology sector has dropped 20% so far this year.
This has prompted investors to shell a record $7.6 billion this year from technology-focused mutual funds and ETFs through April, according to Morningstar Direct data going back to 1993. The ultra-popular Select Sector SPDR Technology ETF (XLK - Free Report) pulled out more than $179 million in capital (read: 6 Reasons Why Tech ETFs May Rebound Soon).
As a result, inverse or inverse-leveraged ETFs have been on the rise as these fetch outsized returns on bearish sentiments in a short span. Daily Dow Jones Internet Bear 3X Shares (WEBS - Free Report) , MicroSectors FANG & Innovation -3x Inverse Leveraged ETN (BERZ - Free Report) , Direxion Daily Cloud Computing Bear 2X Shares , Direxion Daily Technology Bear 3x Shares (TECS - Free Report) and ProShares UltraShort Technology (REW - Free Report) have been outperforming and might continue their strong performance if sentiments remain the same.
The central bank took the most aggressive policy action in decades to combat soaring inflation by raising rates by 50 bps last month and pushing the benchmark above 0.75%. The hike marked the biggest interest-rate increase since 2000, resulting in soaring yields. The 10-year Treasury yields have jumped to the highest level since 2018 to above 3%. 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 (read: Why High Dividend ETFs are Beating the Market).
Further, many of the trends that flourished over the past two years — including bullish options trades, special-purpose acquisition companies and cryptocurrencies — have made a sharp U-turn, thereby dampening the appeal of the technology stocks. Many investors think that the combination of factors has put an end to the the decade-long era of tech dominance in markets.
Leveraged and Inverse-Leveraged ETFs
Leveraged and inverse-leveraged ETFs either create a leveraged long/short position, an inverse long/short position or a leveraged inverse long/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 short period provided the trend remains a friend.
However, these funds run the risk of huge losses compared to traditional funds in fluctuating or seesawing markets. Further, their performance could vary significantly from the actual performance of their underlying index over a longer period when compared to a shorter period (such as weeks or months).
Investors should note that these products are suitable only for short-term traders as these are rebalanced on a daily basis. Further, liquidity can be a big problem as it can make the products more expensive than they appear (see: all the Inverse Equity ETFs here).
Still, ETF investors seeking to tap abrupt movements can go long or short in the near term.
Daily Dow Jones Internet Bear 3X Shares (WEBS - Free Report) – Up 127.7%
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 $40.7 million in its asset base and charges 95 bps in annual fees. The ETF sees an average daily volume of about 335,000 shares.
MicroSectors FANG & Innovation -3x Inverse Leveraged ETN is linked to the three times leveraged inverse performance of the Solactive FANG Innovation Index. The index tracks the stock prices of 15 large-capitalization, highly liquid U.S. technology stocks.
With AUM of $9 million, MicroSectors FANG & Innovation -3x Inverse Leveraged ETN has an expense ratio of 0.95% and trades in an average daily volume of 80,000 shares.
Direxion Daily Cloud Computing Bear 2X Shares - Up 44.2%
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 $19.5 million, Direxion Daily Cloud Computing Bear 2X Shares has an expense ratio of 0.95% and trades in an average daily volume of 12,000 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 $123.6 million in its asset base while charging 95 bps in fees per year from investors. Volume is solid as it exchanges around 3 million shares a day on average (read: Inverse ETFs Take Flight as Market Turns Sour).
ProShares UltraShort Technology (REW - Free Report) – Up 41.7%
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 $12.4 million in its asset base and charges 95 bps in annual fees. It trades in an average daily volume of nearly 64,000 shares.
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).
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5 Inverse ETFs Rallying This Year With Tech Meltdown
The technology sector saw the worst start to a year since 2002 as the giants were hit hard by soaring yields and the Federal Reserve’s tightening monetary. In fact, big technology stocks are facing their biggest rout in more than a decade. The S&P 500’s information-technology sector has dropped 20% so far this year.
This has prompted investors to shell a record $7.6 billion this year from technology-focused mutual funds and ETFs through April, according to Morningstar Direct data going back to 1993. The ultra-popular Select Sector SPDR Technology ETF (XLK - Free Report) pulled out more than $179 million in capital (read: 6 Reasons Why Tech ETFs May Rebound Soon).
As a result, inverse or inverse-leveraged ETFs have been on the rise as these fetch outsized returns on bearish sentiments in a short span. Daily Dow Jones Internet Bear 3X Shares (WEBS - Free Report) , MicroSectors FANG & Innovation -3x Inverse Leveraged ETN (BERZ - Free Report) , Direxion Daily Cloud Computing Bear 2X Shares , Direxion Daily Technology Bear 3x Shares (TECS - Free Report) and ProShares UltraShort Technology (REW - Free Report) have been outperforming and might continue their strong performance if sentiments remain the same.
The central bank took the most aggressive policy action in decades to combat soaring inflation by raising rates by 50 bps last month and pushing the benchmark above 0.75%. The hike marked the biggest interest-rate increase since 2000, resulting in soaring yields. The 10-year Treasury yields have jumped to the highest level since 2018 to above 3%. 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 (read: Why High Dividend ETFs are Beating the Market).
Further, many of the trends that flourished over the past two years — including bullish options trades, special-purpose acquisition companies and cryptocurrencies — have made a sharp U-turn, thereby dampening the appeal of the technology stocks. Many investors think that the combination of factors has put an end to the the decade-long era of tech dominance in markets.
Leveraged and Inverse-Leveraged ETFs
Leveraged and inverse-leveraged ETFs either create a leveraged long/short position, an inverse long/short position or a leveraged inverse long/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 short period provided the trend remains a friend.
However, these funds run the risk of huge losses compared to traditional funds in fluctuating or seesawing markets. Further, their performance could vary significantly from the actual performance of their underlying index over a longer period when compared to a shorter period (such as weeks or months).
Investors should note that these products are suitable only for short-term traders as these are rebalanced on a daily basis. Further, liquidity can be a big problem as it can make the products more expensive than they appear (see: all the Inverse Equity ETFs here).
Still, ETF investors seeking to tap abrupt movements can go long or short in the near term.
Daily Dow Jones Internet Bear 3X Shares (WEBS - Free Report) – Up 127.7%
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 $40.7 million in its asset base and charges 95 bps in annual fees. The ETF sees an average daily volume of about 335,000 shares.
MicroSectors FANG & Innovation -3x Inverse Leveraged ETN (BERZ - Free Report) – Up 68.2%
MicroSectors FANG & Innovation -3x Inverse Leveraged ETN is linked to the three times leveraged inverse performance of the Solactive FANG Innovation Index. The index tracks the stock prices of 15 large-capitalization, highly liquid U.S. technology stocks.
With AUM of $9 million, MicroSectors FANG & Innovation -3x Inverse Leveraged ETN has an expense ratio of 0.95% and trades in an average daily volume of 80,000 shares.
Direxion Daily Cloud Computing Bear 2X Shares - Up 44.2%
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 $19.5 million, Direxion Daily Cloud Computing Bear 2X Shares has an expense ratio of 0.95% and trades in an average daily volume of 12,000 shares.
Direxion Daily Technology Bear 3x Shares (TECS - Free Report) - Up 42%
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 $123.6 million in its asset base while charging 95 bps in fees per year from investors. Volume is solid as it exchanges around 3 million shares a day on average (read: Inverse ETFs Take Flight as Market Turns Sour).
ProShares UltraShort Technology (REW - Free Report) – Up 41.7%
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 $12.4 million in its asset base and charges 95 bps in annual fees. It trades in an average daily volume of nearly 64,000 shares.
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).