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6 Best-Performing Inverse ETFs of Q1

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The first quarter of 2020 was terrible for the global stock market as the coronavirus pandemic resulted in lockdowns and forced people to stay at home. This weighed heavily on business and economic activities across the globe.

In particular, the Dow Jones and the S&P 500 logged in the worst first quarter ever. With mass closures of private businesses, soaring layoffs, unprecedent spike in jobless claims, and declining consumer confidence, investors are growing even more bearish. Revenues of restaurants, hotels, movie theaters, gyms, and airlines have been badly hit with many of them on the brink of bankruptcy. Further, oil price collapsed on lower demand due to the coronavirus outbreak and a price war between Saudi Arabia and Russia (read: 5 ETFs That Outperformed in Q1).

According to a recent survey by Boston Consulting Group, 60% of investors are bearish on the markets for the remainder of 2020, with 55% expecting the "severe" economic impact of the crisis to have ended by the end of the third quarter.

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 gained more than 50% in the first quarter 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 S&P Oil & Gas Exp. & Prod. Bear 2X Shares (DRIP - Free Report) – Up 399.5%

This fund seeks two times inverse exposure to the performance of the S&P Oil & Gas Exploration & Production Select Industry Index. DRIP has accumulated $30.6 million in its asset base and trades in solid volume of around 5.3 million shares a day on average. The fund charges 95 bps in annual fees (read: Worst Not Over for Oil: Short Energy Stocks With These ETFs).

ProShares UltraShort MSCI Brazil Capped ETF (BZQ - Free Report) – Up 93.7%

This fund seeks to deliver twice the inverse performance of the MSCI Brazil 25/50 Index. The benchmark is a market capitalization weighted index designed to measure the equity market performance of the Brazilian market. The product has amassed $22.4 million in its asset base while charging 95 bps in fees and expenses. It trades in good volume of about 261,000 shares a day.

Daily S&P 500 High Beta Bear 3X Shares (HIBS - Free Report) – Up 74.2%

This ETF offers three times inverse exposure of the performance of the S&P 500 High Beta Index. It has gathered $8.4 million in AUM within five months of debut and trades in average daily volume of 27,000 shares. The fund charges 95 bps in fees per year from investors.

Direxion Daily Small Cap Bear 3x Shares (TZA - Free Report) – Up 69.2%

This product provides three times inverse exposure to the Russell 2000 Index, charging 95 bps in fees and expenses. It has been able to manage $373.5 million in its asset base with heavy average daily volume of 3.3 million shares (read: Short Small-Cap ETFs as U.S. May Face Technical Recession).

MicroSectors U.S. Big Banks Index -2X Inverse Leveraged ETN – Up 65.5%

With AUM of $24.2 million, this ETN provides two times inverse exposure to the Solactive MicroSectors U.S. Big Banks Index. It charges 95 bps in annual fees and trades in average daily volume of under 500 shares.

ProShares UltraPro Short MidCap400 ETF (SMDD - Free Report) – Up 64.5%

This product provides three times inverse exposure to the S&P MidCap 400, charging 95 bps in fees and expenses. It has been able to manage $10.5 million in its asset base with moderate average daily volume of 65,000 shares.

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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