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Politics & Geopolitics Loom: Short S&P 500 with These ETFs

Some investors are rotating out of earlier high flying technology stocks into cheap emerging markets.

After peaking multiple times this year, the S&P 500 lost momentum and saw two consecutive weeks of losses given the rising Washington turmoil and looming tensions over North Korea.

This is especially true as the firing of chief strategist Steve Bannon and abandoning of some business councils by President Trump last week renewed worries over the ability to deliver business-friendly policies of tax cuts and infrastructure spending. This has led to investors’ pessimism, sparking off risk aversion (read: 5 Best Performing ETFs of Last Week).

Though the war of words between U.S. and North Korea has eased, joint annual autumn U.S.-South Korea military drills on the Korean Peninsula has intensified tensions with North Korea calling the drills a "reckless" step toward a nuclear conflict.

Further, an uncertain Fed policy, high stock valuations, and sluggish oil price continue to weigh on the stocks. The minutes from the Fed’s July meeting reveal that policymakers are on track to unwind the $4.5 trillion balance sheet but are extremely cautious about weak inflation that might put the third interest rate hike for this year off the table.

Amid the ongoing chaos, the proxy for the S&P 500 Index — SPDR S&P 500 ETF Trust SPY — lost 2% in the past couple of weeks and slipped below its 50-day simple moving average of $244.61. This suggests some rough trading for the index in the days ahead. In fact, some strategists believe that the market is now the most expensive since 2003, signaling further downside. The S&P 500's forward price-earnings ratio expanded to its highest level in 13½ years at 17.7 times in July (read: Time to Short U.S. Equities with ETFs?).

Given the bearish trends, investors could easily tap this opportune moment by going short on the 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:

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 $2 billion and average daily volume of 2.2 million shares. The fund charges 89 bps in annual fees and added 2% in the past two weeks.

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 $33.9 million in its asset base while trades in average daily volume of 9,000 shares. The fund is cheap relative to other inverse products as it charges just 45 bps in annual fees. It gained 1.9% 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 amassed nearly $1.4 billion in AUM and more than 2.3 million shares in average daily volume. It has gained 4% in the same time frame.

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 90 bps per year and trading volume is solid, exchanging more than 5.2 million shares per day on average. It has amassed $721.5 million in its asset base so far and was up 6% in the same time frame (read: Volatility Spikes on Geopolitics: 4 ETF Tactics to Shield).

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 5 bps higher fees. It trades in solid volume of about 1.1 million shares and has AUM of $447.4 million. SPXS was up 6% over the past two weeks.

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 (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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SPDR-SP 500 TR (SPY): ETF Research Reports
PRO-ULSH S&P500 (SDS): ETF Research Reports
SPECIALTY - HEA (SH): ETF Research Reports
PRO-ULT SH S&P5 (SPXU): ETF Research Reports
DIR-D SP5 BR 3X (SPXS): ETF Research Reports
DIR-D SP5 BR (SPDN): ETF Research Reports
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Zacks Investment Research
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