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Trump Slaps Further Tariffs: Profit from Inverse ETFs

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Trade tensions, especially between the world’s two largest economies, have been playing foul on the stock market over the past several months. The situation has worsened after Trump’s latest threat of 10% tariff on further $200 billion in products imported from China.

This time, Washington has targeted key Chinese manufacturing export industries with a wide range of items including refrigerators, furniture, fruit and vegetables, handbags, cotton, rain jackets and baseball gloves. The new tariff will go into effect sometime after Aug 30 (read: Beyond China, These Asia ETFs to Feel the Heat of Trade War).

China's commerce ministry called the U.S. actions "completely unacceptable" and warned of retaliatory moves. But China had bought about $135 billion in U.S. goods last year, indicating that it might not match Trump’s latest move in taxing American products just yet. However, Chinese officials are expected to retaliate in other ways, hitting American firms in China with unplanned inspections, delays in approving financial transactions and other administrative headaches.

The latest round of tariff threats came following warnings by Trump to impose additional tariffs on $500 billion in Chinese goods should Beijing retaliate against the U.S. tariffs that were implemented on Jul 5. Trump imposed 25% import duties on $34 billion in Chinese goods including auto, electric cars, aerospace, communications tech, new materials and robotics. China hit back with the same scale and strength slapping levies on American goods targeting heartland staples like soybeans, corn, pork and poultry. Each side is also planning tariffs on a further $16 billion in goods, which will take the total worth of goods to $50 billion.

Market Impact

Though the initial round of tit-for-tat tariff has been strongly resisted by the global markets, the latest shot in the escalating trade dispute could prove to be catastrophic for stocks. This has raised the appeal for inverse or leveraged inverse ETFs that could generate 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 (read: 5 Best Performing Leveraged/Inverse ETFs of June).

While there are several options available in the space, we have highlighted five such ETFs that could benefit investors in a big way amid trade dispute upheaval, in spite of posing a great deal of risk when compared to traditional products. Investors could make big gains from these products in a very short span according to their risk appetite:

ProShares UltraPro Short S&P500 (SPXU - Free Report) : The fund provides three times (3x) inverse exposure to the S&P 500 index and charges 90 bps in fees per year.

Direxion Daily S&P 500 Bear 3x Shares (SPXS - Free Report) : Like SPXU, this product also provides three times inverse exposure to the S&P 500 index but comes with 5 bps higher fees.

ProShares UltraPro Short Dow30 (SDOW - Free Report) : This fund provides three times inverse exposure to the Dow Jones Industrial Average and charges 95 bps in fees per year (read: Dow ETF in Focus Ahead of Q2 Earnings).

ProShares UltraShort Dow30 (DXD - Free Report) : This fund offers two times inverse exposure to the Dow Jones Industrial Average and charges 95 bps in fees per year.

ProShares UltraPro Short QQQ (SQQQ - Free Report) : This ETF provides three times inverse exposure to the Nasdaq-100 Index and charges 95 bps per year.

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 concerned about growing trade tariff tensions and the resultant downward pressure on the stock market in the near term, any 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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