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Inverse Leveraged ETFs Swell With Assets: Alarm Bells Ringing?

Sanghamitra Saha

Wall Street is definitely off to a great start in 2019 having rebounded from its worst month in almost a decade, thanks mainly to dovish Fed minutes. But things may take a sharp turn for the worse as several investors have started fearing a recession this year, which in turn can cause a panic-driven sell-off.

SPDR S&P 500 ETF (SPY) is up 4.2%,Invesco QQQ Trust (QQQ) has advanced 5.3% and SPDR Dow Jones Industrial Average ETF DIA has gained 3.2% so far this year (as of Jan 15, 2019).

Several investors presume that concerns about global growth slowdown, uncertainty about the trade relation between the United States and China, and the longest-ever U.S. government shutdown could weigh on the domestic as well as global markets.

J.P. Morgan economists have already reduced their first-quarter 2019 GDP growth forecast by a quarter point to 2%, reflecting the shutdown. Bank of America Merrill Lynch economists have lowered 0.1 percentage point from fourth-quarter growth and forecast it at 2.8%.

Both research houses said shutdowns normally hit the economy by 0.1 to 0.2 percentage point per week. A senior economist at the Center for Economic and Policy Research in Washington, D.C. noted that if the current shutdown continues for the whole quarter, “zero growth is very plausible(read: Longest U.S. Government Shutdown: Likely ETF Winners & Losers).”

Inverse Leveraged ETFs Raking in Solid Assets

The $2.3 billion ProShares Short S&P500 (SH) amassed $380 million two weeks ago, its biggest weekly inflow since 2010, per an article published on Bloomberg. The fund has hauled in about $504.5 million so far this year (as of Jan 15, 2019).

And investors have dumped money into triple-leveraged Direxion Daily S&P 500 Bear 3X Shares SPXS almost every day this year. The fund has amassed about $59.9 million in assets this year (as of Jan 15. 2019). Investors have seen about $218 million gushing out of bullish leveraged ETFs tracking the S&P 500 Index this year through Monday.

Is There Any Silver Lining?

There are research houses that are still bullish on the markets and do not see imminent recession. The chief investment officer at OppenheimerFunds sees no U.S. recession in the coming five years. Agreed, the U.S. economy is slowing but it will still grow more than 2%, per OppenheimerFunds.

The CEO of J.P. Morgan Chase does acknowledge shutdown fears and he believes that if there is recession, it won’t be as precarious as the last one. Goldman Sachs does not forecast any recession in major economies in 2019 but low profit growth is highly likely in the United States and Europe (read: Stocks & ETFs to Pick From Goldman Sachs' Favored List in 2019).

In fact the recent asset growth in inverse leveraged S&P ETFs have been viewed as “a way of hedging a portfolio,” by Mark Tinker, head of Framlington Equities Asia at AXA Investment Managers in Hong Kong. He believes that the reasons for “the moves in the ETFs may not be as clear as they seem. For example, traders could be using them to offset existing positions rather than for straight directional bets,” as quoted on Bloomberg.

Bottom Line

With rising rate worries in the United States taking backseat and trade war tensions almost fully priced in at the current level, things should not be too worse in the coming days. If the U.S. government somehow manages to end the shutdown, markets should charge up in the coming days (read: 4 Reasons to Bet on Top-Ranked Small-Cap Growth ETFs).

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SPDR Dow Jones Industrial Average ETF (DIA): ETF Research Reports
ProShares Short S&P500 (SH): ETF Research Reports
SPDR S&P 500 ETF (SPY): ETF Research Reports
Invesco QQQ (QQQ): ETF Research Reports
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