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Beat Brexit-Induced Sell-Off via These Inverse ETFs

Zacks Equity Research

What a similarity between summer 2015 and summer 2016! The only difference is that last year China had induced a global market rout while this time it is the U.K. The outcome of the Brexit referendum – in which the ‘leave’ camp won over the ‘stay’ side by a slight margin – compelled the Wall Street to digest the ‘worst day in 10 months’ on June 24, 2016.

The S&P 500 — which witnessed an appalling Q1 this year but a moderate Q2 – was again in the red in the year-to-date period on June 24, responding to the Brexit decision. Such a massive slide was anyhow expected as the unprecedented event was not priced in. Poll results just prior to the vote pointed to higher chances of a ‘Bremain’ than ‘Brexit’. This caught investors off guard and the global market crashed.

While the root of the crisis – the U.K. and the peripheral broader Europe – was hit hard, with many of these losing over 10% on a single trading day, the ripple effect was felt in the global stock market (read: Brexit Shocker Forces These European ETFs Over 10% Lower).

Global Bloodbath

The S&P 500-based ETF SPY lost over 3.6% while the Dow Jones-based product DIA shed about 3.4% and the Nasdaq-oriented fund QQQ tumbled over 4.1%. Financial stocks mainly weighed on the S&P 500 with the “busiest trading volume for a single session in nearly five years.” An analyst at Bank of America Merrill Lynch, expects the S&P 500 to fall 6–7%, based on the track that the index had set after reacting to prior external shocks (read: UK Votes for Brexit: ETFs Winners & Losers).

The all-world ETF ACWI fell about 5.4% and the emerging market ETF EEM plunged about 6.1%. Specifically, the U.K. ETF EWU was crushed and saw about 12% in losses while the developed market ETF VEU retreated about 7.7%. The Euro zone ETF EZU lost over 11.5% and Europe ETF VGK plummeted around 11.3%.

Amid all the mayhem, volatility levels flared up to record highs, with the CBOE Volatility index surging about 49% to 25.76, the highest level since February 11, as per Reuters. iPath S&P 500 VIX ST Futures ETN VXX skyrocketed over 24.3% on June 24 and tacked on 1.6% gains after hours (read: 6 Sector ETFs Threatened by Brexit Uncertainty). 

Short Global Stocks?

Given this, stocks globally will undergo a strong selling pressure and investors could easily tap this opportune moment by going short on various global equity indices. There are a number of inverse or leveraged inverse products in the market that offer inverse (opposite) exposure to such indices. Below we highlight those and some of the key differences between each (read: ETF Strategies to Gain from in the Rest of 2016):

Short U.S. Stocks

ProShares Short S&P500 ETF SH – Up 3.7% on June 24

This fund provides unleveraged inverse exposure to the daily performance of the S&P 500 index.

ProShares UltraShort S&P500 ETF SDS– Up 7% on June 24

This fund seeks two times (2x) leveraged inverse exposure to the index.

ProShares UltraPro Short S&P500 SPXU– Up 10.6% on June 24

Investors having a more bearish view and higher risk appetite could find SPXU interesting as the fund provides three times (3x) inverse exposure to the index.

ProShares Short QQQ PSQ– Up 4.1% on June 24

It offers inverse unleveraged exposure to the NASDAQ-100 Index.

ProShares Short Dow30 DOG– Up 3.3% on June 24

It offers inverse unleveraged exposure to the Dow Jones Industrial Average Index.

ProShares Short Financials SEF– Up 4.3% on June 24

This fund provides unleveraged inverse exposure to the daily performance of the Dow Jones U.S. Financials Index.

Short EAFE (Europe, Australasia and Far East)

ProShares Short MSCI EAFE EFZ– Up 8.7% on June 24

This fund provides inverse exposure to the daily performance of the MSCI EAFE Index.

Short Emerging Market

Short MSCI Emerging Markets ETF EUM– Up 6% on June 24

The product gives inverse exposure to the MSCI Emerging Markets Index.

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. Still, for ETF investors who are bearish on the equity market for now, a near-term short could be intriguing for those with high-risk tolerance (see: all the Inverse Equity ETFs here).

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