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Nasdaq Correction Zone: Short Index With These ETFs

Sanghamitra Saha

The pain in the tech space has been acute for the past one month for one reason or another. In May, it was U.S.-China trade tension that dealt a blow to the space and now it is the Justice Department’s likely launch of an antitrust probe against big tech names that shoved the tech-heavy Nasdaq index to correction territory. The net result is a 10.2% slump in Invesco QQQ Trust(QQQ) in the past month.

It all started with the Trump administration raising tariffs on $200-billion worth of Chinese goods from 10% to 25% on May 10 and China announcing a retaliatory move —- a tariff hike on $60-billion worth of American goods to 25% starting Jun 1. Not only this, Washington has U.S. firms from doing business with the Chinese giant Huawei, citing national security concerns (read: Top ETF Stories of May).

On May 23, the U.S. Commerce Department stated that it was proposing a new rule to implement anti-subsidy duties on products from countries that undervalue their currencies against the U.S. dollar, another move that could undermine Chinese trade. The Trump administration also intensified trade tensions with Mexico at the end of the month. Investors are worried about the fact that the trade war may last much longer than anticipated. 

Trade & Tech

Tech companies, specifically semiconductors and tech hardware and equipment, are exposed the most to this trade war. This is because the rising tariffs will make the products of tech giants like Apple and other American biggies costlier to manufacture. This, in turn, will likely compel hardware manufacturers to hike prices at home while duties on finished goods exporting to China could also make products expensive for buyers in that country, per techcrunch.com (read: Tense About Trade War? Follow Goldman With 5 ETF Strategies).

Regulatory Fears & Tech

If this was not enough, the tech space started June on a weak note with the U.S. government planning to grill a host of big companies in the industry with antitrust and business practice probes. Shares of tech giants like Alphabet GOOGL (down 6.1%), Amazon AMZN (down 4.6%), Facebook FB (down 7.5%) and Apple AAPL (down 1%) were hard hit.

ProShares UltraPro Short QQQ (SQQQ) – Up 6.4% on Jun 4

The fund looks at daily investment results, before fees and expenses, which correspond to triple the inverse of the daily performance of the NASDAQ-100 Index.

The underlying index includes 100 of the largest domestic and international non-financial companies. It reflects companies across major industry groups including computer hardware and software, telecommunications, retail/wholesale trade and biotechnology. The fund charges 95 bps in fees.

ProShares UltraShortQQQ (QID) Up 4.3% on Jun 4

The fund looks to attain daily investment results, before fees and expenses, which correspond to twice (200%) the inverse (opposite) of the daily performance of the NASDAQ-100 Index. The expense ratio of the fund is 0.95%.

Proshares Short QQQ (PSQ) Up 2.2% on Jun 4

The fund looks to track the inverse of the daily performance of the NASDAQ-100 Index. It charges 95 bps in fees (read: Profit From Trump's Anti-Trade Policies With Inverse ETFs).

Word of Caution

The strategy is beneficial for short-term traders as it could lead to huge losses compared with traditional funds in fluctuating markets. Further, their performances could vary significantly from the actual performance of their underlying index over a longer period when compared with the shorter period (such as, weeks or months) due to their compounding effect. Still, for ETF investors who are bearish on Nasdaq for the near term, either of the above products could make an interesting choice  (see: all the Inverse Equity ETFs here).

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