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Trump Tariff Threats Resume: How to Profit With Inverse ETFs

Sweta Killa

After reaching a peak last week, Wall Street tumbles with the resurfacing of President Donald Trump’s tariff threat. This is especially true as Trump announced that he will increase tariffs on Chinese goods worth $200 billion to 25% from 10% this week that were delayed in February on hopes of a deal.

Trump cited that trade talks with China are continuing, but are moving too slowly as Beijing is trying to re-negotiate. Trump is also seeking to target a further $325 billion of Chinese goods with 25% tariffs "shortly." If Trump’s threats are executed, essentially all products imported to the United States from China will face some sort of tariff.

The announcement came as a surprise as U.S.-China trade talks are due to resume this week with Chinese vice premier Liu He expected to travel to Washington on May 8 to end the trade war between the world's two biggest economies. As such, Trump’s move marked a major escalation in trade tensions between the world's two largest economies raising worries over global growth (read: US-China Close to a Trade Deal? High-Beta & Risky ETFs to Tap).

The International Monetary Fund, the World Bank, and others have downgraded their global growth forecasts, saying the U.S.-China standoff is reducing world trade and creating uncertainty for companies trying to decide where to buy supplies, build factories and make investments.

The situation has raised the appeal for inverse or leveraged inverse ETFs that could generate big gains in a short span. These products either create an inverse position or leveraged (200% or 300%) inverse position in the underlying index through the use of swaps, options, future contracts and other financial instruments.

Given this, investors seeking to capitalize the bearish market sentiments in a short span could consider any of the following inverse ETFs.

Direxion Daily Semiconductor Bear 3x Shares SOXS

This ETF offers three times (300%) inverse exposure to the PHLX Semiconductor Sector Index, charging investors 95 bps in annual fees. It has amassed about $168.9 million in its asset base while trading in solid volumes of 6.1 million shares a day on average (read: Semiconductor ETF Tops in April: 5 Stocks Leading the Rally).

ProShares UltraPro Short S&P500 SPXU

This fund provides three times inverse exposure to the S&P 500 Index. It charges a fee of 91 bps per year and has solid trading volume, exchanging about 5.4 million shares per day on average. SPXU has amassed $497 million in its asset base.

ProShares Ultra Short Industrials ETF SIJ

This product seeks two times (200%) the inverse of the daily performance of the Dow Jones U.S. Industrials Index, charging investors 95 bps in annual fees. It has been able to manage $2.7 million in its asset base and sees a meager volume of around 11,000 shares a day on average.

Direxion Daily Technology Bear 3x Shares TECS

This product provides three times inverse exposure to the daily performance of the Technology Select Sector Index. It has amassed about $37.6 million in its asset base, while charging 95 bps in fees per year from investors. Volume is good as it exchanges around 539,000 shares a day on average (read: Semiconductor ETF Tops in April: 5 Stocks Leading the Rally).

ProShares UltraPro Short QQQ SQQQ
 
This ETF provides three times inverse exposure to the daily performance of the Nasdaq-100 Index, charging 95 bps in annual fees. It has AUM of $970.9 million and trades in average daily volume of about 33.7 million shares. It charges 95 bps per year.

ProShares UltraPro Short Dow30 ETF SDOW

This fund provides three times inverse exposure to the Dow Jones Industrial Average. It charges a fee of 95 bps per year and trading volume is solid, exchanging about 5.1 million shares per day on average. It has amassed $219.3 million in its asset base.

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 the Inverse Equity ETFs here).

Still, for ETF investors who are concerned over renewed tariff threats and the resultant downward pressure on the stock market for the near term, either of the above products could make an interesting choice. Clearly, a near-term short could be intriguing for those with high-risk tolerance, and a belief that the “trend is the friend” in this corner of the investing world.

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