With optimism over American-Sino trade hopes fading, the U.S. stock market has again started to falter after a smooth ride in September.
Earlier this week, the White House expanded the trading blacklist by adding 28 Chinese companies, including artificial intelligence firms. It cited the role of these firms in Beijing’s repression of Muslim minorities in northwest China just days before high-level trade talks are set to resume in Washington on Oct 10. Additionally, the Trump administration is slapping visa bans on Chinese officials linked to the mass detention of Muslims.
Further, Bloomberg reported that the Trump administration is moving ahead with discussions around possible restrictions on capital flows into China, with focus on investments made by U.S. government pension funds. The series of steps raised doubts over the success of U.S.-China trade talks.
If these weren’t enough, the latest bout of downbeat data also added to the woes. The U.S. producer prices posted the biggest drop in eight months in September while the Institute for Supply Management’s purchasing managers index for the manufacturing sector dropped to 47.8 in September, representing the lowest level in more than a decade.
The combination of factors has resulted in strong demand for inverse or inverse leveraged ETFs. These products either create a short position or a leveraged short position in the underlying index through the use of swaps, options, future contracts and other financial instruments. Due to their compounding effect, investors can enjoy higher returns in a short period of time, provided the trend remains a friend.
However, these funds run the risk of huge losses compared with traditional funds in fluctuating or seesawing markets. Further, their performance could vary significantly from the actual performance of the underlying index over the longer period when compared to a shorter period (such as, weeks or months).
We have highlighted six leveraged inverse ETFs that are up more than 15% over the past week though these involve a great deal of risk when compared to traditional products. This trend might continue at least for the near term if sentiments remain the same.
Direxion Daily Natural Gas Related Bear 3X Shares GASX – Up 39.9%
This product provides three times inverse exposure to the ISE-Revere Natural Gas Index. It has amassed $9.2 million in its asset base and trades in solid volume of 32,000 shares a day on average. The ETF charges 95 basis points (bps) in fees per year.
Direxion Daily S&P Oil & Gas Exp. & Prod. Bear 3X Shares DRIP – Up 36.2%
This fund seeks three times inverse exposure of the performance of the S&P Oil & Gas Exploration & Production Select Industry Index. DRIP has accumulated $38.1 million in its asset base and trades in solid volume of more than 646,000 shares a day on average. The fund charges 95 bps in annual fees.
Direxion Daily S&P Biotech Bear 3x Shares LABD – Up 26.6%
This product seeks to deliver three times the inverse daily performance of the S&P Biotechnology Select Industry Index. The fund has amassed $73.1 million in its asset base and average daily volume of more than 2.9 million shares. It charges investors 95 bps in annual fees and expenses.
Direxion Daily Energy Bear 3x Shares ETF ERY - Up 24.5%
This product provides three times inverse exposure to the Energy Select Sector Index. It has AUM of $30.1 million and trades in good volume nearly 212,000 shares. The ETF charges annual fee of 95 bps.
ProShares UltraShort Oil & Gas DUG – Up 16.1%
This fund seeks two times inverse exposure to the Dow Jones U.S. Oil & Gas Index, charging investors 95 bps in fees. It has amassed $17.2 million in its asset base and trades in lower volume of more than 47,000 shares per day on average.
MicroSectors U.S. Big Banks Index -3X Inverse Leveraged ETN BNKD – Up 15.9%
BNKD seeks to offer three times inverse exposure to the Solactive MicroSectors U.S. Big Banks Index. The ETN has accumulated $20.4 million in its asset base. It charges 95 bps in annual fees and trades in average daily volume of under 1,000 shares.
While the strategy is highly beneficial for short-term traders, it could lead to huge losses compared with traditional funds in fluctuating markets.
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 attractive for those with high-risk tolerance, and a belief that the “trend is the friend” in this specific corner of the investing world.