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Inverse ETFs Surge as Trade War Fears Escalate

Sweta Killa
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Though strong earnings, tax reform and encouraging economic fundamentals are giving some boost to the stocks, trade war fears are playing foul on the stock market. The spat between the United States and its major allies, especially China and the European Union (EU), has turned bitter in recent weeks with tit-for-tat exchange of tariffs.

In an escalating dispute, Trump is seeking to curb many Chinese companies from investing in U.S. technology firms and block additional technology exports to China. The Treasury Department is working on the rules to block companies with at least 25% Chinese ownership from buying companies involved in "industrially significant technology.” The measures are expected to be announced by the end of this week and are intended to counter Beijing's Made in China 2025 strategic plan. This is the second phase of the previously announced tariff on $50 billion worth of Chinese goods.

Additionally, the trade dispute with the EU also deepened on Jun 22 after Trump tweeted that he would impose another 25% tariff, targeting imported autos from the European Union. The response came following the EU’s threat of 25% duties on $3.2 billion worth of American goods exported to the 28-member bloc starting Jun 22 against the U.S. tariffs on European steel and aluminum.

Worsening trade tariff talks could trigger a global trade war, raising the appeal for inverse or leveraged inverse ETFs that could generate big gains in a short span. These products either create an inverse position or leveraged (200% or 300%) inverse position in the underlying index through the use of swaps, options, future contracts and other financial instruments (see: all the Inverse Equity ETFs here).

While there are a number of inverse products available in the market, we have highlighted those that delivered handsome returns last week and are expected to do so as long as trade worries loom.

Direxion Daily Semiconductor Bear 3x Shares SOXS

This ETF offers three times (300%) inverse exposure to the PHLX Semiconductor Sector Index, charging investors 95 bps in annual fees. It has amassed about $83.8 million in its asset base while trading in solid volumes of 1.9 million shares a day on average. The fund surged 11.4% last week (read: Why This Semiconductor ETF Lost Almost Half of its Assets).

ProShares UltraPro Short Dow30 ETF SDOW

This fund provides three times inverse exposure to the Dow Jones Industrial Average. It charges a fee of 95 bps per year and trading volume is solid, exchanging about 4.4 million shares per day on average. It has amassed $185.7 million in its asset base so far and was up 6.4% last week.

ProShares UltraPro Short Financial Select Sector ETF FINZ

This ETF provides three times inverse exposure to the S&P Financial Select Sector Index. It charges 95 bps per year while the average daily trading volume is paltry at just 5,000 shares. It has amassed $0.8 million in AUM and gained 4.6% last week.

ProShares Ultra Short Industrials ETF SIZ

This product seeks two times (200%) the inverse of the daily performance of the Dow Jones U.S. Industrials Index, charging investors 95 bps in annual fees. It has been able to manage $2.6 million in its asset base and sees a meager volume of around 200 shares a day on average. SIZ gained 4.1% last week.

Direxion Daily Technology Bear 3x Shares TECS

This product provides three times inverse exposure to the daily performance of the Technology Select Sector Index. It has amassed about $29.3 million in its asset base, while charging 95 bps in fees per year from investors. Volume is good as it exchanges around 175,000 shares a day on average. The fund gained 4% last week (read: Tech ETFs Scaling New Highs on Surging FANG Stocks).

Bottom Line

While the strategy is highly beneficial for short-term traders, it could lead to huge losses compared with traditional funds in fluctuating or seesaw markets. Further, their performances 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.

Still, for ETF investors who are concerned over growing trade tariff tensions and the resultant downward pressure on the stock market 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 high-risk tolerance, and a belief that the “trend is the friend” in this corner of the investing world.

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PRO-SH 3X FINL (FINZ): ETF Research Reports
PRO-ULS DOW30 (SDOW): ETF Research Reports
DIR-D SM BR 3X (SOXS): ETF Research Reports
DIR-TEC BEAR3X (TECS): ETF Research Reports
QS-US MN SIZE (SIZ): ETF Research Reports
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