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Wall Street has been struggling this year, with the S&P 500 in bear territory since last week. The combination of factors such as decades-high inflation, the Russia-Ukraine conflict and Fed’s aggressive tightening policy are weighing heavily on investors’ sentiment. Investors have increasingly been concerned that the economy will plunge into recession.
The bearish trend is likely to continue if the past 150 years of stock market history is any guide. And to benefit from this trend, investors 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.
Going by Societe Generale’s study of post-crisis market valuations starting in the 1870s, the S&P 500 may need to tumble as much as 40% to 2,900 from its January peak in the next six months to hit bottom.
The sell-off in the S&P 500 Index aggravated when the Fed raised interest rates by 75 bps in its latest FOMC meeting — the biggest increase since 1994 — and signaled continued tightening ahead, which could further weigh on stocks. Fed Chair Jerome Powell said another hike of 50 or 75 bps at the next meeting in July is likely. An increase in interest rates means higher loan rates for consumers and businesses, including mortgages, credit cards and auto loans that will likely cut consumer spending (read: Long/Short ETFs to Consider Amid Market Turmoil).
Additionally, rounds of data suggest a slowdown in economic activity in the key sectors. Mortgage rates reached their highest level in more than 13 years, while retail sales registered a bigger-than-expected drop in May as record gasoline prices prompted households to cut back on spending. As the global economy is struggling with skyrocketing inflation and low growth, the World Bank has warned of a recession. The war in Ukraine, lockdowns in China, supply-chain disruptions, and the risk of stagflation are curtailing growth.
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 $2.7 billion and an average daily volume of 43 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 $422.3 million in its asset base while trading in an average daily volume of 3.8 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 (read: S&P 500 Near Bear Market: Inverse ETFs in Focus).
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 $1.1 billion in AUM and nearly 14 million shares in average daily volume.
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 26.3 million shares per day on average. It has amassed $887.2 million in its asset base.
Like SPXU, this product also provides three times inverse exposure to the index but has 5 bps higher fees. It trades in a solid volume of about 23.3 million shares and has AUM of $598.5 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 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 S&P 500 ETFs to Bet on Bearish Trend
Wall Street has been struggling this year, with the S&P 500 in bear territory since last week. The combination of factors such as decades-high inflation, the Russia-Ukraine conflict and Fed’s aggressive tightening policy are weighing heavily on investors’ sentiment. Investors have increasingly been concerned that the economy will plunge into recession.
The bearish trend is likely to continue if the past 150 years of stock market history is any guide. And to benefit from this trend, investors 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.
Going by Societe Generale’s study of post-crisis market valuations starting in the 1870s, the S&P 500 may need to tumble as much as 40% to 2,900 from its January peak in the next six months to hit bottom.
The sell-off in the S&P 500 Index aggravated when the Fed raised interest rates by 75 bps in its latest FOMC meeting — the biggest increase since 1994 — and signaled continued tightening ahead, which could further weigh on stocks. Fed Chair Jerome Powell said another hike of 50 or 75 bps at the next meeting in July is likely. An increase in interest rates means higher loan rates for consumers and businesses, including mortgages, credit cards and auto loans that will likely cut consumer spending (read: Long/Short ETFs to Consider Amid Market Turmoil).
Additionally, rounds of data suggest a slowdown in economic activity in the key sectors. Mortgage rates reached their highest level in more than 13 years, while retail sales registered a bigger-than-expected drop in May as record gasoline prices prompted households to cut back on spending. As the global economy is struggling with skyrocketing inflation and low growth, the World Bank has warned of a recession. The war in Ukraine, lockdowns in China, supply-chain disruptions, and the risk of stagflation are curtailing growth.
We profiled the ETFs below:
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 $2.7 billion and an average daily volume of 43 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 $422.3 million in its asset base while trading in an average daily volume of 3.8 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 (read: S&P 500 Near Bear Market: Inverse ETFs in Focus).
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 $1.1 billion in AUM and nearly 14 million shares in average daily volume.
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 26.3 million shares per day on average. It has amassed $887.2 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 has 5 bps higher fees. It trades in a solid volume of about 23.3 million shares and has AUM of $598.5 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 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.