Trade war, which has kept the stock market on the edge for more than a year, escalated with a new round of Trump tariff threats and China retaliation, leading to a bloodbath across the globe.
President Donald Trump unexpectedly threatened to impose a new tariff of 10% on the remaining $300 billion of Chinese goods effective Sep 1. The new duty, which is expected to increase more than 25% later, will be levied on a long list of goods including smartphones, laptop computers and children’s clothing. With this, the United States will effectively tax all Chinese imports (read: Trump Threatens New Tariff: 5 ETF Buying Zones).
Meanwhile, China retaliated by allowing the yuan to slip to the lowest level against the dollar in more than a decade. Per Bloomberg News, China has halted imports of U.S. agricultural products. This has ignited concerns that China was undervaluing its currency to make its exports more competitive in global markets.
The worsening tit-for-tat tariff situation has intensified fears of further global slowdown, pushing the stock market in deep red. MSCI's All Country World Index, which tracks shares in 47 countries, slumped 2.5% to a two-month low on Aug 5. The S&P 500, Dow and Nasdaq each saw their biggest percentage drops of 2019, plunging 3%, 2.9% and 3.5%, respectively, and recorded their worst start to August since 2011. Benchmark stock indexes in Japan, Australia and Hong Kong dropped more than 2%.
The myriad woes have resulted in huge demand for inverse or leveraged inverse ETFs for investors seeking to make big gains in a short span. These products either create an inverse (opposite) position or leveraged (2x or 3x) inverse position in the underlying index through the use of swaps, options, future contracts and other financial instruments.
In fact, many products have generated double-digit returns in the past week though these involve a great deal of risk when compared to traditional products. Below, we have highlighted seven such ETFs that crushed the market over the past five days and should continue doing so at least for the near term if the same trends prevail:
VelocityShares Daily 2x VIX Short-Term ETN (TVIX - Free Report) – Up 71.6%
This note offers two times exposure to the S&P 500 VIX Short-Term Futures Index. TVIX is popular with average daily volume of around 21.8 million shares and AUM of about $1.1 billion. It has expense ratio of 1.65%.
Direxion Daily Semiconductor Bear 3x Shares (SOXS - Free Report) – Up 38.4%
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 1.1 million shares. It manages $237.2 million in its asset base (read: After Upbeat July, Will Semiconductor ETFs Slump in August?).
Direxion Daily FTSE China Bear 3x Shares (YANG - Free Report) – Up 30.1%
This fund provides three times the inverse return of the FTSE China 50 Index. It has AUM of around $97.9 million and sees good trading volume of 411,000 shares a day on average. Expense ratio came in at 0.95%.
Direxion Daily Emerging Markets Bear 3X Shares (EDZ - Free Report) – Up 28.5%
This ETF offers three times inverse exposure to the MSCI Emerging Markets Index, charging investors 95 bps in annual fees. It has amassed about $74.5 million in its asset base while trading in good volumes of 244,000 shares a day on average.
Direxion Daily Technology Bear 3x Shares (TECS - Free Report) - Up 27.8%
This product provides three times inverse exposure to the daily performance of the Technology Select Sector Index. It has amassed about $52.7 million in its asset base while charging 95 bps in fees per year from investors. Volume is good as it exchanges around 663,000 shares a day on average.
BMO REX MicroSectors FANG+ Index -3X Inverse Leveraged ETN (FNGD - Free Report) – Up 25.7%
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 $22.1 million since then. It charges 95 bps in annual fees and trades in average daily volume of 82,000 shares (read: Fed & Trade Trigger Market Bloodbath: 6 Hot Inverse ETF Areas).
MicroSectors U.S. Big Banks Index -3X Inverse Leveraged ETN (BNKD - Free Report) – Up 25%
BNKD seeks to offer three times leveraged exposure to the Solactive MicroSectors U.S. Big Banks Index. The ETN has accumulated $21.1 million in its asset base. It charges 95 bps in annual fees and trades in average daily volume of under 1,000 shares.
While the strategy is highly beneficial for short-term traders, it could lead to huge losses compared with traditional funds in fluctuating markets. Further, the performances of these funds 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 Leveraged Equity ETFs here).
Still, for ETF investors who are 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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