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3 Ways to Short Nasdaq with ETFs

Sweta Killa

Thanks to persistent global slowdown and a strong dollar, the tech heavy Nasdaq Composite Index has been creeping closer to the bear territory, having shed about 18% from its all-time high recorded last July.

In fact, most of the tech heavyweight stocks have already fallen into a bear territory, losing more than 20% so far this year. These include Tesla Motors (TSLA), Amazon (AMZN), Netflix (NFLX), Apple (AAPL) and Cisco (CSCO). The social networking firm LinkedIn (LNKD) also witnessed a sharp meltdown of 46% on February 5, after reporting a wide earnings miss. With this, shares of LNKD are down 55% in the year-to-date timeframe (read: LinkedIn Crashes: Should You Connect with Social Media ETF?).

The steep decline for the sector came as many tech companies generate major chunks of revenues from overseas. Additionally, a slew of disappointing earnings reports from the major players, lofty valuations and lesser expectations for higher interest rates after a disappointing job data for January are weighing on investors’ sentiments. Notably, the two high-growth corners – Internet and software – have been hit hard, compelling investors to avoid them.


As per the Zacks Earnings Trend, though Q4 earnings and revenue surprises were better than Q3 and the past four-quarter average, total earnings for 87.9% of the sector market cap was flat on 2.1% higher revenues compared with 7% growth in earnings and 4.9% revenue growth recorded in Q3. Robust earnings growth from Alphabet (GOOGL), Facebook (FB) and a few others were offset by flat or declining growth at legacy players like Microsoft (MSFT), Intel (INTC) and others. Even technology giant Apple failed to cheer investors as it reported the slowest-ever sales for iPhone, suggesting that the company’s period of exponential growth may be ending (read: Tech Face Off: Alphabet Versus Apple ETFs).


Moreover, healthcare stocks, which hold a substantial potion in the Nasdaq Index after technology, are also witnessing sharp declines since the start of the year with most of them hitting a new one-year low (read: Biotech ETFs Hit 52-Week Lows: Time to Buy?).  


Added to the negative sentiment is the report from Bloomberg that stated, “options traders are betting the pain is far from over in the Nasdaq 100 Index, pushing the cost of options to its highest relative to the S&P since the middle of the financial crisis in 2008.” As per the data from the Commodity Futures Trading Commission, hedge funds and large speculators have pared back their long positions on the Nasdaq 100 for the fourth week of 2016 out of five.

Given the sluggish backdrop, bearish investors may want to go near-term short on the Nasdaq- 100 index. Fortunately, with the advent of ETFs, there are a number of inverse or leveraged inverse products that offer inverse (opposite) exposure to the Nasdaq index. Below we highlight those and some of the key differences between each:


ProShares Short QQQ (PSQ)


This fund provides unleveraged inverse exposure to the daily performance of the Nasdaq-100 Index. It has accumulated AUM of nearly $404.9 million and average daily volume of around 608,000 shares. The fund charges 95 bps in annual fees.


ProShares UltraShort QQQ (QID)


This fund seeks two times (2x) leveraged inverse exposure to the index, charging 95 bps in fees. It is also relatively popular and liquid having amassed $392 million in AUM and 5 million in average daily volume (read: Bubbles Bursting For Technology ETFs?).


ProShares UltraPro Short QQQ (SQQQ)


Investors having a more bearish view and a higher risk appetite could find SQQQ interesting as the fund provides three times (3x) inverse exposure to the index. Though the ETF has amassed $378.2 million in its asset base so far, trading volume is solid, exchanging about 9.1 million shares per day on average. It charges 95 bps per year.

Bottom Line

As a caveat, investors should note that such products are suitable only for short-term traders as these are rebalanced on a daily basis (see: all the Inverse Equity ETFs here).


Still, for ETF investors who are bearish on Nasdaq for the near term, either of the above products could make an interesting choice. Clearly, a near-term short could be intriguing for those with a high risk tolerance, and a belief that the “trend is the friend” in this corner of the investing world.