After peaking in early May, Wall Street was on a tumultuous ride thanks to worsening trade relationship between the United States and China. This is easily evident from a tit-for-tat tariff between the two largest countries. The Trump administration raised tariffs from 10% to 25% on Chinese goods worth $200 billion on May 10 and China hits back with duties as much as 25% on $60 billion worth of U.S. imports effective Jun 1.
Additionally, Trump threatened to blacklist Chinese firm Huawei Technologies and add it to its "entity list," which means American companies cannot provide tech to Huawei without the government’s permission. Trump is also considering blacklisting other major Chinese technology companies including Hikvision, ZTE, Hytera and Dahua. In retaliation to this, China is seeking to restrict rare-earth exports to the United States (read: How China Could Retaliate Huawei Ban & Its Impact on ETFs). The stock market rout worsened lately last week after the Trump administration threatened to slap tariffs on all goods coming from Mexico in a bid to curb illegal immigration. Washington will impose a 5% tariff from Jun 10 that will increase to 10% on Jul 1 if illegal immigration across the southern border was not stopped. Levies will then rise by 5% each month up to 25% by Oct 1. The tariff will permanently remain at the 25% level unless and until the crisis stops. The combination of tariff threats triggered a round of market sell-off, pushing the U.S. stocks lower. Notably, Wall Street logged in the worst May since 2010 with Dow Jones falling 6.7%, S&P 500 losing 6.6% and Nasdaq declining 7.9%. This has resulted in strong demand for inverse leveraged ETFs as investors can seek higher returns in a short time span (read: Profit From Trump's Anti-Trade Policies With Inverse ETFs). VIDEO
These products either create a short position or a leveraged short position in the underlying index through the use of swaps, options, future contracts and other financial instruments. Due to their compounding effect, investors can enjoy higher returns in a short period of time provided the trend remains a friend. However, these funds run the risk of huge losses compared with traditional funds in fluctuating or seesawing markets. Further, their performance could vary significantly from the actual performance of their underlying index over the longer period when compared to a shorter period (such as, weeks or months).
Still, we have highlighted five leveraged inverse ETFs that gained more than 40% in May though these involve a great deal of risk when compared to traditional products. This trend might continue at least for the near term if sentiments remain the same. Direxion Daily Semiconductor Bear 3x Shares ( SOXS - Free Report) – Up 69.8% This ETF provides three times inverse exposure to the PHLX Semiconductor Sector Index. It charges 0.95% in annual fees and trades in average daily volume of 7.6 million shares. It manages $268.8 million in its asset base (read: 5 Inverse ETFs That Gained in Double Digits Last Week). BMO REX MicroSectors FANG+ Index -3X Inverse Leveraged ETN ( FNGD - Free Report) – Up 68.9% This note seeks to offer three times inverse leveraged exposure to the NYSE FANG Index, which is 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. The ETN has accumulated $28.1 million in its asset base. It charges 95 bps in annual fees and trades in average daily volume of 81,000 shares. Direxion Daily S&P Oil & Gas Exp. & Prod. Bear 3X Shares ( DRIP - Free Report) – Up 47.6% This fund seeks three times inverse exposure of the performance of the S&P Oil & Gas Exploration & Production Select Industry Index. DRIP has accumulated $47.6 million in its asset base and trades in solid volume of more than 4.4 million shares a day on average. The fund charges 95 bps in annual fees (read: What Went Wrong With Oil Services ETFs in May?). Direxion Daily Regional Banks Bear 3x Shares ( WDRW - Free Report) – Up 41.1% WDRW seeks to deliver thrice the inverse return of the S&P Regional Banks Select Industry Index, charging 95 bps in fees per year. WDRW has accumulated $1.7 million in its asset base and trades in paltry volume of around 7,000 shares a day on average. Direxion Daily Natural Gas Related Bear 3X Shares ( GASX - Free Report) – Up 40.2% This product provides three times inverse exposure to the ISE-Revere Natural Gas Index. It has amassed $3.5 million in its asset base and trades in solid volume of 25,000 shares a day on average. The ETF charges 95 bps in fees per year. Caveat 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 what they appear (see: all the Inverse Equity ETFs here). Want key ETF info delivered straight to your inbox? Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>