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Global Markets in Red for 2018: 8 Inverse ETF Winners

Sanghamitra Saha

Global markets including Wall Street have been anything but steady this year. It took a dive at the January-February period on rising rate concerns in the United States, remained volatile on trade tensions and the emerging market (EM) pain in the middle (barring some occasional spikes) and again slumped in the fourth quarter on fears of peaking U.S. economic growth. Apart from these, oil price slump and the return of the slowdown in several economies also played foul.

The net result is global markets turning red for the year. The S&P 500 is down about 5.6%, the Dow Jones Industrial Average is off about 4.7%, the NASDAQ Composite is losing about 3.6% and the small-cap benchmark Russell 2000 has nosedived about 11.1% so far this year (as of Dec 17, 2018).

Plus, all-world ETF iShares MSCI ACWI ETF ACWI is down 9.9%,Vanguard FTSE Europe ETF VGK is off 17.7%, iShares Asia 50 ETF AIA has lost 17.2%, iShares Latin America 40 ETF ILF has retreated 13.3% and iShares MSCI Emerging Markets ETF (EEM) is down 17.8%.

Fed & Trade Held Responsible for Bloodbath

All through 2018, the Fed has been hawkish and has already enacted three rate hikes. There are 68% chances of a 25-bp hike in the Dec 18-19 meeting. All these have increased the short-term U.S. Treasury yields meaningfully this year while concerns about slowing growth have put a cap on the long-term yields, resulting in a flattening yield curve and invoking recessionary fears.

Also, the gradual end of a cheap money era led to a huge selloff in the equity market. Investors should also note that if inflation keeps rising, the real return of an asset will decline. Also, rising U.S. interests will result in lesser profits for the corporates. And the benefits of the tax reform there are over.

To add to the woes, the International Monetary Fund (IMF) lowered its global growth forecast in October on issues between the United States and its trading partners and recently said that it may again cut the forecast in January (read: IMF Cuts Global Growth Forecast: ETFs in Focus).

Michael Wilson of Morgan Stanley noted in November that a “buy-the dip” strategy could not gather strength to take off this year. And such things happened before only “during bear markets, or the beginning of one," Wilson wrote.

Inverse ETF Winners

Given the upheaval, several inverse ETFs saw a strong ride this year (read: Profit From Market Bloodbath With These Inverse ETFs).

Short Oil & Gas ProShares DDG — Up 16.2%

Supply glut took a toll on oil prices this year, making the road clear for this inverse fund, which measures the performance of the energy sector of the U.S. equity market.

ProShares Short MSCI EAFE EFZ — Up 15.8%

The fund proved to be a good way to short stocks from the EAFE region and avoid the spillover effect of the global trade fear.

Short MSCI Emerging Markets ProShares EUM — Up 15.8%

The EM bloc has seen a lot of upheaval in 2018 with pain in Argentina and Turkey epitomizing the crisis. Mainly hurt by the double whammy of a hawkish Fed and trade war fears, EM investing went into a tailspin. So, EUM has every reason to outperform in 2018 (read: Are Argentina and Turkey ETFs Good Contrarian Bets for 2019?).

ProShares Decline of the Retail Store ETF EMTY — Up 11.9%

The fund seeks capital appreciation from the decline of brick-and-mortar retailers through short exposure to the Solactive-ProShares Bricks and Mortar Retail Store Index. The retail landscape is changing, with online sales gradually taking control. Online retailing hit a home run this holiday season as evident from upbeat Thanksgiving and Black Friday data (read: ETF & Stock Picks to Bet on Upbeat Retail Sales in November).

ProShares Short Midcap 400 MYY — Up 11.5%

As Wall Street skidded, mid caps joined the bandwagon and this inverse mid-cap ETF gained.

ProShares Short FTSE China 50 YXI — Up 10.6%

Obviously, things will be unsteady in China given the trade tensions.

ProShares Short Russell 2000 RWM — Up 9.7%

While the small-cap segment benefited from trade worries and a rising greenback, it fell prey to a faster-than-expected Fed policy tightening.

Short Financials ProShares SEF — Up 8.5%

A flattening yield curve is negative for the financial stocks as it reduces companies’ net interest rate margin.