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Profit from Trump Slump with These Inverse ETFs

Sanghamitra Saha

After a solid Trump bump, Wall Street seemed to have taken a breather. The S&P 500 and the Dow Jones Industrial Average dipped for three consecutive days on March 8, 2017 in over a month. There were multiple reasons for the slump.

Chief among these are the Fed’s rate hike bets as early as next week, the worst decline in energy shares in nearly six months and rout in pharma stocks on Trump’s indication to fix the price-gouging issue (read: Trump Tweet on Drug Pricing Hits Biotech and Pharma ETFs).

Overvaluation concerns also played a role in bringing down U.S. stocks. The S&P 500 is currently trading close to 18 times the expected earnings, against its long-term average of about 15 times (as per Reuters). Investor optimism touched a 30-year high, signaling a correction on any negative news (read: 5 Alternative ETFs to Avoid 'Cognitive Dissonance' in Market).

Oil prices plummeted over 5% to touch this year’s low on March 8 on higher-than-expected U.S. crude inventory built. This triggered the possibility of no respite in the oil patch that the OPEC members tried to bring about with an output curb deal in late 2016.

Such a huge plunge in oil prices was strong enough to overshadow the Trump rally. WTI crude oil ETF United States Oil USO was down 5.3% on March 8 and the biggest energy fund Energy Select Sector SPDR ETF XLE lost about 2.6% on the same day.

Pharmaceutical stocks also took a beating lately as President Donald Trump tweeted that a "new system” is being planned to lower sky-high drug prices, though details were not provided. Plus, House Republicans released a bill on March 6 to repeal and replace the Obamacare healthcare law, which is now subject to negotiation (read: Healthcare ETFs in Focus on Obamacare Replacement Plan).

Meanwhile, traders priced in about 85.2% possibility of a March rate hike, according to Thomson Reuters’ data, remarkably up from 30% in the beginning of last week. Upbeat economic data especially in the field of job and inflation stoked rising rate fears. Most market watchers now expect faster Fed rate hikes this year. If this happens, there will be a gradual cease in cheap dollar inflows, which may hold back generous investments in stocks.

Amid all the upheavals, volatility levels flared up, with iPath S&P 500 VIX ST Futures ETN VXX rising about 0.6% on March 8.  These worries may keep the stock market volatile, giving investors a chance to ride it out through inverse ETFs. While there are several options available in the space, we have highlighted four ETFs that are widely spread across a number of sectors and not concentrated on a particular sector or industry.

ETFs in Focus

ProShares Short S&P500 ETF SH – Up 0.3% on March 8, 2017

This fund provides unleveraged inverse exposure to the daily performance of the S&P 500 index.

ProShares UltraShort S&P500 ETF SDS – Up 0.5% on March 8

This fund seeks two times (2x) leveraged inverse exposure to the index.

ProShares UltraPro Short S&P500 SPXU – Up over 0.5 % on March 8

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.

ProShares Short Dow30 DOG – Up 0.2% on March 8

It offers inverse unleveraged exposure to the Dow Jones Industrial Average Index.

Bottom Line

As a caveat, investors should note that such products are suitable only for short-term traders as these are rebalanced on a daily basis. Still, for ETF investors who are bearish on the equity market for now, a near-term short could be intriguing for those with high-risk tolerance (see: all the Inverse Equity ETFs here).

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US-OIL FUND LP (USO): ETF Research Reports
 
IPATH-SP5 VX ST (VXX): ETF Research Reports
 
PRO-ULSH S&P500 (SDS): ETF Research Reports
 
SPDR-EGY SELS (XLE): ETF Research Reports
 
PRO-SHRT S&P500 (SH): ETF Research Reports
 
PRO-SHRT DOW30 (DOG): ETF Research Reports
 
PRO-ULT SH S&P5 (SPXU): ETF Research Reports
 
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