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Profit From Escalating Trade War Fears With Inverse ETFs

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Wall Street is on high alert with the Dow Jones dropping for the fifth consecutive session on Jun 18 and escalating trade war fears pushing up chances of a further decline. This is especially true as Trump threatened to impose tariffs of up to $400 billion on Chinese goods on top of the $50 billion goods announced on Jun 15 unless Beijing reverses course on its own trade actions and does not change its unfair practices.

This is the latest escalation in a worrying trade dispute. Trump has directed U.S. trade representative to analyze a 10% tariff on additional $200 billion worth of Chinese goods. If China retaliates to these additional tariffs, Trump will further impose duties on another $200 billion.

The latest news came after China imposed duties of “the same scale and strength” as Trump’s list of Chinese goods targeted for 25% tariff (read: Trade War Heats Up Again: ETFs & Stocks in Focus).

The round of sanctions and retaliation will intensify the fight with China into an all-out trade war. It can also trigger a global trade war, hurting the worldwide economy and corporate profits, particularly at big U.S. exporters. Given this, investors could ride out the downbeat sentiments through inverse or leveraged inverse ETFs as investors embrace these products for big gains in a short span.

These products either create an inverse position or leveraged (200% or 300%) inverse position in the underlying index through the use of swaps, options, future contracts and other financial instruments. While there are a number of inverse products available in the market, we have highlighted the ETFs that offer inverse exposure to the Dow Jones index, which includes the 30 blue chip companies. Investors should trade them cautiously, keeping their risk appetite in mind:

ProShares Short Dow 30 ETF (DOG - Free Report)

This product seeks to deliver inverse exposure to the daily performance of the Dow Jones Industrial Average. The fund has managed $222.7 million in its asset base while charging 95 bps in fees and expenses. Volume is solid as it exchanges 438,000 shares per day on average. DOG has gained 1.4% over the past week (read: Renewed Trade Spat Grips Market: 6 ETF Buying Zones).  

ProShares UltraShort Dow30 ETF (DXD - Free Report)

This fund seeks two times (200%) leveraged inverse exposure to the index, charging 95 bps in fees. It has amassed nearly $139.8 million in AUM and trades in average daily volume of more than 641,000 shares. It has gained 2.7% in the same time frame.

ProShares UltraPro Short Dow30 ETF (SDOW - Free Report)

Investors having a more bearish view and higher risk appetite could find SDOW interesting as the fund provides three times (300%) inverse exposure to the index. The ETF charges a fee of 95 bps per year and trading volume is solid, exchanging more than 4.3 million shares per day on average. It has amassed $191.9 million in its asset base so far and is up 4% over the past week.

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 seesaw 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 who are bearish on the Dow Jones for the near term, either of the above products could make an interesting choice. Clearly, a near-term short could be intriguing for those with high-risk tolerance, and a belief that the “trend is the friend” in this corner of the investing world.

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