Inverse ETFs To Play If Coronavirus Keeps Hurting Markets

The rapidly spreading coronavirus has hit the stock market hard with the major U.S. indices falling into a correction territory. This is especially true as the number of COVID-19 cases outside China is rising with new cases emerging in New Jersey and New York and the first death recorded in California.

According to the latest figures from the Johns Hopkins Whiting School of Engineering's Centers for Systems Science and Engineering, at least 206 people have tested positive for COVID-19 in the United States and 11 people have died. Iran now has 3,513 cases and 107 deaths, Italy has recorded 3,858 cases and 148 deaths, and South Korea has 6,088 cases and 35 deaths. Worldwide the total number of cases is 97,870 and 3,347 related deaths.

If coronavirus continues to spread and hit global growth, it will disrupt supply chains and have a negative long-term economic impact on trade, ports, consumer spending and consumer confidence. In fact, travel and leisure companies are beginning to feel the coronavirus impact. A growing number of companies have warned that the epidemic will prevent them from meeting sales or profit targets for the first three months of the year (read: 3 Safe ETFs for Volatile Markets).

The Organization for Economic Cooperation and Development said the virus had put the world economy in its most "precarious position" since the 2008 financial crisis. According to a recent analysis from MSCI, the U.S. equities could fall another 11% from Mar 3 levels. Given that the stocks have already fallen more than 10% on coronavirus fears, additional double-digit declines would spell the end of the nearly 11-year bull market.

However, the central banks around the world are taking measures to counter economic weakness. In order to protect the longest ever economic expansion in the face of the deadly virus, the Fed slashed the interest rates by half-percentage point to the range of 1.00-1.25%.

How to Play?

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. 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 compared to a shorter period (such as, weeks or months).

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

Direxion Daily Energy Bear 3x Shares ETF ERY

This product provides three times inverse exposure to the Energy Select Sector Index. It has AUM of $35.2 million and trades in good volume nearly 329,000 shares. The ETF charges annual fee of 95 basis points (bps) and has gained 65.3% in a month (read: Goldman Forecasts Waning Demand: Oil ETFs to Lose).

Direxion Daily Consumer Discretionary Bear 3X Shares (PA:PASS)

This fund seeks three times inverse exposure of the performance of the Consumer Discretionary Select Sector Index. It has accumulated $1.4 million in its asset base and trades in paltry volume of about 6,000 shares a day on average. The fund charges 95 bps in annual fees.

Direxion Daily S&P 500 Bear 3x Shares SPXS

This product provides three times inverse exposure to the S&P 500 Index, charging 95 bps in annual fees from investors. It trades in solid volume of about 10 million shares and has AUM of $477.4 million. SPXS jumped 27.2% in a month (read: How to Short the S&P 500 With ETFs).

Direxion Daily Regional Banks Bear 3x Shares WDRW

WDRW seeks to deliver thrice the inverse return of the S&P Regional Banks Select Industry Index, charging 95 bps in fees per year. WDRW has accumulated $1.5 million in its asset base and trades in a paltry volume of around 6,000 shares a day on average.

ProShares Ultra Short Industrials ETF SIJ

This product seeks two times 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 $1.9 million in its asset base and sees a meager volume of around 5,000 shares a day on average (read: Is it the Right Time to Invest in Industrial ETFs?).

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 $57.2 million in its asset base, while charging 95 bps in fees per year from investors. Volume is good as it exchanges around 1.8 million shares a day on average.

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 $1.9 billion and trades in average daily volume of about 19.8 million shares. SQQQ charges 95 bps per year.

Bottom Line

While the strategy is highly beneficial for short-term traders, it could lead to huge losses compared with traditional funds in fluctuating markets (see: all the Inverse Equity ETFs here).

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.

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Direxion Daily S&P 500 Bear 3X Shares (SPXS): ETF Research Reports

Direxion Daily Energy Bear 3X Shares (ERY): ETF Research Reports

ProShares UltraPro Short QQQ (SQQQ): ETF Research Reports

Direxion Daily Regional Banks Bear 3X Shares (WDRW): ETF Research Reports

Direxion Daily Technology Bear 3X Shares (TECS): ETF Research Reports

ProShares UltraShort Industrials (SIJ): ETF Research Reports

Direxion Daily Consumer Discretionary Bear 3X Shares (PASS): ETF Research Reports

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Zacks Investment Research