Markets

Inverse ETFs Gaining More Than 20% in September

The month of September has been brutal for the U.S. stock market with the S&P 500 Index on track for its sharpest decline in September since 2002, according to Dow Jones Market Data (read: "Worst September in 18 Years"? 4 Sector ETFs Surviving Selloffs).

The combination of lofty valuation, lack of additional fiscal stimulus package, election uncertainty and rising U.S.-China tensions have weighed on investors’ sentiment. Resurgence in COVID-19 cases in the United States and Europe has sparked concerns over the global economic recovery and lockdown measures. Most parts of Europe have already re-imposed restriction measures. The fight over a Supreme Court nominee to replace Justice Ruth Bader Ginsburg and allegations of money laundering against big banks also added to the chaos.

This has resulted in strong demand for inverse or inverse-leveraged ETFs. 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 (see: all the Inverse Equity ETFs here).

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

We have highlighted some leveraged inverse ETFs from different corners of the stock market that have piled up more than 20% gains this month, though these involve a great deal of risk when compared to traditional products. This uptrend might continue, at least for the near term, if sentiments remain the same.

MicroSectors U.S. Big Oil Index -3X Inverse Leveraged ETN NRGD – Up 55.2%

NRGD offers three times inverse exposure to the Solactive MicroSectors U.S. Big Oil Index. The ETN has accumulated $15 million in its asset base. It charges 95 bps in annual fees and trades in average daily volume of about 51,000 shares.

Direxion Daily S&P Oil & Gas Exp. & Prod. Bear 2X Shares DRIP – Up 39.5%

This fund seeks two times inverse exposure to the performance of the S&P Oil & Gas Exploration & Production Select Industry Index. DRIP has accumulated $52.2 million in its asset base and trades in solid volume of around 617,000 shares a day on average. The fund charges 95 bps in annual fees.

MicroSectors U.S. Big Banks Index -3X Inverse Leveraged ETN BNKD – Up 27.6%

This ETF seeks to offer three times inverse exposure to the Solactive MicroSectors U.S. Big Banks Index. The ETN has accumulated $7.2 million in its asset base. It charges 95 bps in annual fees and trades in average daily volume of about 13,000 shares (read: 3 Reasons to Be Wary of Bank ETFs).

Direxion Daily Communication Services Index Bear 3X Shares MUTE – Up 27.4%

This ETF seeks to deliver three times the inverse performance of the Communication Services Select Sector Index, charging investors 95 bps in annual fees. It has AUM of $3 million and average daily volume of under 1,000 shares.

Direxion Daily Financial Bear 3x Shares ETF FAZ – Up 25.6%

This product provides three times inverse exposure to the Russell 1000 Financial Services Index. Though it charges annual fee of 95 bps, it is extremely popular with AUM of $315 million and trades in heavy volume of around 3 million shares.

ProShares UltraPro Short QQQ SQQQ – Up 24.1%
 
This ETF provides three times inverse exposure to the daily performance of the Nasdaq-100 Index, charging 95 bps in annual fees. It has AUM of $1.7 billion and trades in average daily volume of about 50.5 million shares (read: 5 Inverse Tech ETFs Jump on Fastest-Ever Nasdaq Correction).

Direxion Daily Technology Bear 3x Shares TECS - Up 23.6%

This product provides three times inverse exposure to the daily performance of the Technology Select Sector Index. It has amassed about $74.2 million in its asset base while charging 95 bps in fees per year from investors. Volume is good as it exchanges around 3.4 million shares a day on average.

ProShares UltraPro Short MidCap400 ETF SMDD – Up 23%

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 $15.8 million in its asset base with moderate average daily volume of 41,000 shares.

Daily S&P 500 High Beta Bear 3X Shares HIBS – Up 22.5%

This ETF offers three times inverse exposure of the performance of the S&P 500 High Beta Index. It has gathered $51.6 million in AUM and trades in average daily volume of 1.1 million shares. The fund charges 95 bps in fees per year from investors.

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.

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 attractive 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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Direxion Daily SP Oil Gas Exp. Prod. Bear 2X Shares (DRIP): ETF Research Reports

Direxion Daily Financial Bear 3x Shares (FAZ): ETF Research Reports

ProShares UltraPro Short QQQ (SQQQ): ETF Research Reports

Direxion Daily Technology Bear 3X Shares (TECS): ETF Research Reports

ProShares UltraPro Short MidCap400 (SMDD): ETF Research Reports

Direxion Daily Communication Services Index Bear 3X Shares (MUTE): ETF Research Reports

MicroSectors U.S. Big Oil Index 3X Inverse Leveraged ETN (NRGD): ETF Research Reports

MicroSectors U.S. Big Banks Index 3X Inverse Leveraged ETNs (BNKD): ETF Research Reports

Direxion Daily SP 500 High Beta Bear 3X Shares (HIBS): ETF Research Reports

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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