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Inverse ETFs to Bet on as Trade War Fears Grip Markets

Sweta Killa

With the return of trade war fears, the Wall Street is likely to post losses for the first time in May in seven years. The three major indices namely the S&P 500, Dow Jones and Nasdaq Composite Index have shed at least 4% so far this month and are poised to further drop in the week ahead.  

If the losses continue over the next several trading sessions, it would result in the first May decline for any of the benchmarks since 2012, according to Dow Jones Market Data.

The sell-off in the stocks was initially sparked by President Donald Trump’s tariff increase on Chinese goods worth $200 billion. The administration’s next move to ban Chinese firm Huawei Technologies and add it to its "entity list", which means American companies cannot provide tech to Huawei without the government’s permission, worsened the stock market rout and intensified the trade dispute between the two countries. Trump is now considering blacklisting other major Chinese technology companies including Hikvision, ZTE, Hytera and Dahua (read: 5 Tech ETFs Losing the Most on Huawei Ban: What's Ahead?).

Additionally, fears of Britain exiting European Union without a deal are rising and will weigh on the market in the near term. Added to the woes is the weak service sector data, which shows that service sector growth surprisingly slowed down in May to a three-year low as increased trade tensions dealt a blow to order book growth and business confidence, thereby hurting economy.

The rounds of negative news have compelled investors to short the U.S. stock market. According to data from IHS Markit Ltd, short interest as a percentage of shares outstanding on the SPDR S&P 500 ETF SPY climbed as high as 7% this week, marking the highest share since 2015 when the benchmark gauge for American equities slipped into a correction as Fed officials began boosting rates from near zero.

Given the bearish trends, investors could easily tap the opportune moment by going short on the S&P 500 Index. There are a number of inverse or leveraged inverse products in the market that offer inverse (opposite) exposure to the index. Below, we highlight those and some of the key differences between each (read: 5 Leveraged/Inverse ETFs That Are Up 20% Plus So Far in Q2):

ProShares Short S&P500 ETF SH

This fund provides unleveraged inverse exposure to the daily performance of the S&P 500 index. It is the most popular and liquid ETF in the inverse equity space with AUM of nearly $1.9 billion and average daily volume of 6.5 million shares. The fund charges 89 bps in annual fees and added 2% over the past week.

Direxion Daily S&P 500 Bear 1X Shares SPDN

This ETF also offers unleveraged inverse exposure to the daily performance of the S&P 500 index. It has accumulated $13.9 million in its asset base while trading in average daily volume of 27,000 shares. The fund is cheap relative to other inverse products as it charges just 45 bps in annual fees. It gained 2% in the same time frame.

ProShares UltraShort S&P500 ETF SDS

This fund seeks two times (2x) leveraged inverse exposure to the index, charging 90 bps in fees. It is also relatively popular and liquid having $947.7 million in AUM and more than 6.3 million shares in average daily volume. It has gained 4% over the past week (read: 5 ETFs to Hedge Against Market Volatility).    

ProShares UltraPro Short S&P500 SPXU

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. The ETF charges a fee of 91 bps per year and trading volume is solid, exchanging around 5.5 million shares per day on average. It has amassed $516.4 million in its asset base so far. It has gained 5.8% in the past week.

Direxion Daily S&P 500 Bear 3x Shares SPXS

Like SPXU, this product also provides three times inverse exposure to the index but comes with 4 bps higher fees. It trades in solid volume of about 6.9 million shares and has AUM of $371.9 million. SPXS was up 5.7% over the past week.

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. Further, the performances of these funds could vary significantly from the actual performance of their underlying index over a longer period when compared to the shorter period (such as, weeks or months) due to their compounding effect (see: all Leveraged 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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