Wall Street has been witnessing a tough ride this month due to U.S.-China trade conflicts, weak global economic data, low inflation and political unrest in Hong Kong. These have reignited worries over the global slowdown and resulted in a steep fall in global yields. In fact, the U.S. Treasury yield curve temporarily inverted on Aug 13 for the first time since June 2007 as 10-year yields broke below 2-year yields, signaling that the world’s biggest economy could be heading for a recession (read: Low Volatility ETFs for Turbulent Times).
This has resulted in strong demand for inverse or inverse leveraged ETFs as investors can seek higher returns in a short time span. 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 the underlying index over the longer period when compared to a shorter period (such as, weeks or months).
Still, we have highlighted six leveraged inverse ETFs that are up more than 30% so far in August 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 Natural Gas Related Bear 3X Shares GASX – Up 66.6%
This product provides three times inverse exposure to the ISE-Revere Natural Gas Index. It has amassed $6.7 million in its asset base and trades in solid volume of 25,000 shares a day on average. The ETF charges 95 basis points (bps) in fees per year.
Direxion Daily S&P Oil & Gas Exp. & Prod. Bear 3X Shares DRIP – Up 65%
This fund seeks three times inverse exposure of the performance of the S&P Oil & Gas Exploration & Production Select Industry Index. DRIP has accumulated $47.8 million in its asset base and trades in solid volume of more than 770,000 shares a day on average. The fund charges 95 bps in annual fees.
Direxion Daily Regional Banks Bear 3x Shares – Up 42.4%
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 6,000 shares a day on average (read: How to Short Financial Sector With ETFs).
MicroSectors U.S. Big Banks Index -3X Inverse Leveraged ETN BNKD – Up 41.1%
BNKD seeks to offer three times inverse exposure to the Solactive MicroSectors U.S. Big Banks Index. The ETN has accumulated $26.5 million in its asset base. It charges 95 bps in annual fees and trades in average daily volume of under 1,000 shares.
MicroSectors U.S. Big Oil Index -3X Inverse Leveraged ETN NRGD – Up 38%
NRGD offers three times inverse exposure to the Solactive MicroSectors U.S. Big Oil Index. The ETN has accumulated $65.6 million in its asset base. It charges 95 bps in annual fees and trades in average daily volume of under 1,000 shares (read: Oil Collapses to Bear Market: Bet on Inverse Energy ETFs).
Direxion Daily Energy Bear 3x Shares ETF ERY - Up 34.7%
This product provides three times inverse exposure to the Energy Select Sector Index. It has AUM of $35.4 million and trades in good volume nearly 178,000 shares. The ETF charges annual fee of 95 bps.
While the strategy is highly beneficial for short-term traders, it could lead to huge losses compared with traditional funds in fluctuating markets (see: all the Inverse 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.
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 >>