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Inverse ETFs That Gained More Than 20% in January

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After scaling new highs to start the year on the initial U.S.-China trade deal, Wall Street is badly shaken by the fast-spreading coronavirus that has led to fears of a worldwide pandemic. Notably, the Dow Jones and the S&P 500 erased gains made early in the year, shedding 1% and 0.2%, respectively.

The latest study from China’s National Health Commission shows that at least 213 people have died and about 9,700 have been affected. President Donald Trump has declared a public health emergency over the coronavirus outbreak, ordering up to 14 days of quarantine for citizens returning from China’s Hubei province and denying entry to some foreigners. This has resulted in travel disruptions and the suspension of flights to China (read: Best & Worst ETFs of Coronavirus-Affected January).

According to Goldman Sachs, the epidemic will likely cut U.S. economic growth by 0.4 perecentage points in the first quarter as the number of tourists from China plunge and exports to the Asian nation slow down.

Against this backdrop, investors are rushing to inverse or inverse-leveraged ETFs to increase returns on quick market turns in a short span. These products either create an inverse long/short position or a leveraged inverse long/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 very short period of time provided the trend remains a friend.

However, these funds run the risk of huge losses compared to traditional funds in fluctuating or seesawing markets. Further, their performances could vary significantly from the actual performance of their underlying index over a longer period when compared to a shorter period (such as, weeks or months).

Still, we have highlighted some inverse products that gained more than 20% in January though these involve a great deal of risk when compared to traditional products. This trend might continue at least in the near term provided the sentiments remain the same.

Direxion Daily Natural Gas Related Bear 3X Shares GASX – Up 91.4%

This product provides three times inverse exposure to the ISE-Revere Natural Gas Index. It has amassed $17.9 million in its asset base and trades in a solid volume of 67,000 shares a day on average. The ETF charges 95 bps in fees per year.

Direxion Daily S&P Oil & Gas Exp. & Prod. Bear 3X Shares (DRIP - Free Report) – Up 82.2%

This fund seeks three times inverse exposure of the performance of the S&P Oil & Gas Exploration & Production Select Industry Index. DRIP has accumulated $46.4 million in its asset base and trades in solid volume of more than 470,000 shares a day on average. The fund charges 95 bps in annual fees (read: Virus Scare Weighs on Oil ETFs: Go Short for the Near Term).

Direxion Daily Energy Bear 3x Shares ETF ERY - Up 40%

This product provides three times inverse exposure to the Energy Select Sector Index. It has AUM of $33.4 million and trades in good volume nearly 280,000 shares. The ETF charges annual fee of 95 bps.

Direxion Daily FTSE China Bear 3x Shares YANG – Up 28%

This fund targets the Chinese stock market and provides three times the inverse return of the FTSE China 50 Index. It has AUM of around $173.6 million and sees good trading volume of 411,000 shares a day on average. Expense ratio comes in at 0.95% (read: Can China ETFs Survive the Coronavirus Onslaught?).

Direxion Daily Regional Banks Bear 3x Shares WDRW – Up 23.4%

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 $2.3 million in its asset base and trades in a paltry volume of around 6,000 shares a day on average.

Bottom Line

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.

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