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Traders Are Flocking to These Bearish ETFs

This article was originally published on ETFTrends.com.

Entering Tuesday, the S&P 500 was sporting a year-to-date gain of nearly 3%. That is not deterring some traders from making bearish bets against the benchmark U.S. equity gauge.

Data suggest traders are embracing inverse ETFs, including the ProShares Short S&P500 (SH) , one of the largest and most heavily traded inverse exchange traded funds in the U.S.

SH is not a leveraged fund. Rather, the ProShares product is designed to deliver the daily inverse performance of the S&P 500. For example, if the S&P 500 falls by 1% on a particular day, SH should rise by a similar amount.

The Direxion Daily S&P 500 Bear 3X ETF (SPXS) , which looks to deliver triple the daily inverse performance of the S&P 500, is also luring bearish traders.

“About $218 million has flowed out of bullish leveraged ETFs tracking the S&P 500 Index this year, even as the benchmark has rebounded from its worst month in almost a decade,” reports Bloomberg. “Meanwhile, funds that capitalize on inverse movements in the benchmark have attracted almost three times that amount in inflows, putting them on course for their best month of asset gathering since July 2016, according to data compiled by Bloomberg.”

Steady ETF Flows

The triple-leveraged SPXS invests in swap agreements, futures contracts, short positions or other financial instruments that, in combination, provide inverse (opposite) or short leveraged exposure to the index equal to at least 80% of the fund’s net assets.

“The $2.3 billion ProShares Short S&P 500 ETF took in $380 million two weeks ago, its biggest weekly inflow since 2010,” according to Bloomberg. “And investors have put money into triple-leveraged Direxion Daily S&P 500 Bear 3X Shares almost every day this year.”

Related: 10 New ETFs to Capture the Long and Short Side of a Market View

Before getting involved with inverse and leveraged ETFs, traders should understand how these products work. Even SH, which is not leveraged, can be subject to the effects of daily compounding.

“Due to the compounding of daily returns, ProShares’ returns over periods other than one day will likely differ in amount and possibly direction from the target return for the same period,” according to ProShares. “These effects may be more pronounced in funds with larger or inverse multiples and in funds with volatile benchmarks. Investors should monitor their holdings as frequently as daily.”

The triple-leveraged SPXS is down nearly 9% this year, reminding investors that inverse and geared ETFs are not intended to be more than short-term trades.

For more on leveraged & inverse ETFs, please visit our Leveraged & Inverse Channel.

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