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Profit from Wall Street Sell-Off with These Inverse ETFs

Sanghamitra Saha

Wall Street suffered its worst day in two months on September 9, following the Fed Bank of Boston President Eric Rosengren’s comments that a 'gradual tightening' is possible. Rosengren expressed confidence in labor market strength and expects U.S. GDP growth to score above 2% over the coming two quarters. He is normally known for dovish comments and this sudden change to hawkishness bulldozed stocks on Friday. This heightened volatility and drove iPath S&P 500 VIX ST Futures ETN VXX 16.1% higher (read: ETF Winners & Losers Post Jackson Hole Meet).

In any case, the investing world was abuzz with Fed hike speculation at August end with the U.S economy gaining steam. But the lackluster job, manufacturing and service sector data for the month of August turned the talks off for a short while (read: August Job Data Muddles Fed Rate Hike Chance: ETFs to Buy).

Many market watchers almost ruled out the possibility of a rate hike at the FOMC meeting that is barely a week away and pushed the timeline to December. However, the latest comment from Rosengren triggered rate hike talks all over again. Fearing a sooner-than-expected rate hike and the gradual ceases in cheap dollar inflows, key U.S. equity indices – which were already guilty of overvaluation concerns – slumped.

The S&P 500 lost about 2.5%, Dow Jones Industrial Average shed over 2.1% and the Nasdaq composite plunged over 2.5% on September 9. The ripple effect of the Wall Street sell-off spread to the global market, with Asia ETF iShares Asia 50 AIA losing about 2.6%, iShares MSCI Emerging Markets ETF EEM slumping about 3.4%, Vanguard FTSE Europe ETF VGK falling 2.1%, iShares MSCI Japan ETF EWJ shedding about 1.7% and all-world ETF iShares MSCI ACWI ACWI retreating over 2.3% on September 9.

Other Reasons Driving Markets Lower

The U.S. bond market gives a clearer indication, with the U.S. 10-year Treasury yield rising 13 bps in just two days to 1.67% on September 9, while yield on the six-month U.S. Treasury yield growing 2 bps to 0.51% during the same timeframe. This steepening of the yield curve indicates that investors still have faith in economic growth despite the dreary job, manufacturing and service sector data for the month of August.

Apart from the Fed official’s comments, a sharp decline in oil prices following increased drilling by U.S. producers flared up supply glut fears in the oil patch. Oil ETFs, United States Oil USO and United States Brent Oil BNO plummeted about 3.3% and 3.5% on September 9, respectively, giving another reason to the global market to slide (read: Should You Buy Oil ETFs Ahead of the OPEC Meet?).

Investors also turned anxious over risky assets after a nuclear test by North Korea, which may lead to geo-political risks. Talks that the Bank of Japan is mulling over means to steepen the yield curve of the Japanese bonds, along with the hearsay that the central banks do have not more ways to offer further stimuli also hit global securities, as per Reuters.

More Downside Risks Ahead?

Analysts expect further sell-offs as rate hike speculation may be rife through the week and the S&P 500 fell “through key support levels.” A few Fed speakers are about to comment on September 12, and along with many analysts, we too believe that a slight sign of hawkishness from them would stretch the market crash (read: Believe in George Soros? Short S&P 500 with These ETFs).

As per analysts like David Rosenberg, a steep pullback is impending as presently an overvalued broader market is not ready to digest a Fed hike. In fact, the presidential election in November and a lukewarm U.S. economy can also be an overhang, even if the Fed does not announce a hike in September. Marko Kolanovic, JPMorgan's Global Head of Derivatives and Quantitative Research, also cautioned about imminent volatility in the market.

Short U.S. Stocks?

Given this, U.S. stocks may undergo a strong selling pressure and investors could easily tap this opportune moment by going short on various U.S. equity indices. There are a number of inverse or leveraged inverse products in the market that offer inverse (opposite) exposure to such indices. Below we highlight those and some of the key differences between each:

ProShares Short S&P500 ETF (SH) – Up Over 2.4% on September 9

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

ProShares UltraShort S&P500 ETF (SDS )  – Up 4.8% on September 9

This fund seeks two times (2x) leveraged inverse exposure to the S&P 500 index.

ProShares UltraPro Short S&P500 (SPXU) – Up Over 7.1% on September 9

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 S&P 500 index.

ProShares Short QQQ (PSQ) – Up Over 2.5% on September 9

It offers inverse unleveraged exposure to the daily performance of the NASDAQ-100 Index.

ProShares Short Dow30 (DOG) – Up 2.1 % on September 9

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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ISHARS-JAPAN (EWJ): ETF Research Reports
ISHARS-EMG MKT (EEM): ETF Research Reports
US-OIL FUND LP (USO): ETF Research Reports
IPATH-SP5 VX ST (VXX): ETF Research Reports
US BRENT OIL FD (BNO): ETF Research Reports
ISHRS-MSCI ACWI (ACWI): ETF Research Reports
PRO-ULT SH S&P5 (SPXU): ETF Research Reports
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