For some sectors in the stock market, this is the best time to go against the market. After doing due diligence, I've concluded that while some sectors are doing fine and are investable, others are worth shorting. No wonder contrarian traders are always looking for a way to profit when an asset class declines in value. That is when inverse exchange-traded funds (ETFs) become helpful. Although these investments may be innately risky for the long term, seasoned market professionals like myself find them useful.
What Are Inverse ETFs?
The price of an inverse ETF rises when its target asset class, like the S&P 500, falls, decreasing when its target asset class increases. Because the ETF performance is inverse to the asset it is tracking, they are aptly named Inverse ETFs. These classes of ETFs are created using financial derivatives such as futures or options. Sometimes, they can move two or three times the price of the asset class it is tracking. Therefore, you would expect the value of these ETFs to decay over time.
It is not advisable to hold these ETFs over a long period. Inverse ETFs track daily changes in the asset class pegged to them. You risk compounding losses when holding an Inverse ETF over a long period. The losses even increase with the increase in the leverage of the inverse ETF.
One advantage inverse ETFs hold over mutual funds is that you can trade them during market hours. Therefore, they have become ideal vehicles for financial innovation.
ProShares UltraPro Short QQQ
Proshare established the UltraPro Short QQQ (NASDAQ: SQQQ) in February 2020. This inverse ETF tracks the Nasdaq 100. The strategy of the SQQQ is to produce results that are roughly opposite that of the Nasdaq 100 daily. Then those results are multiplied by a particular factor. Most times, the SQQQ triples the opposite effects of the Nasdaq 100.
This fund is ideal at this moment when indices like the Nasdaq 100 are struggling. For example, technology, telecommunications, and health care stocks are struggling due to market uncertainties, and these companies make up the central part of the Nasdaq 100. So, the SQQQ has been performing very well during this period.
The total assets under management, AUM, by SQQQ is currently $2.5 billion from Q1 2022 reports.
Direxion Daily Semiconductor Bear 3x Shares
The SOXS (NYSE: SOXS)is a daily short leveraged fund to the PHLX Semiconductor Index. This fund is ideal for investors with a bearish short-term outlook for equities in the semiconductor industry. This fund's advantage is that it has a compounding advantage for investors daily because the SOXS leverage resets daily. Many sophisticated investors speak praises of this tool. However, it is not recommended for investors with a low-risk tolerance or to engage in a buy-and-hold strategy.
The SOXS has been performing very well recently because the semiconductor industry has recently lost momentum. For example, last week, it lost more than 12%. In addition, supply constraints compound these losses that continue to affect the industry and the weaknesses big technology stocks have brought to the sector. Notable among these are NVIDIA Corporation ($796.77|-3.33%), Advanced Micro Devices (NASDAQ: AMD), and Qualcomm (NASDAQ: QCOM). Also, rising U.S interest rates have been factors that made the SOXS to be performing very well recently due to the effect it has on semiconductor companies.
The SOXS has an asset under management, AUM, of $6.07 million by Q1 2022.
ProShares UltraShort 20+ Year Treasury
The TBT (NYSE: TBT) fund tracks the ICE U.S Treasury 20+ Year Bond Index. The daily investment results are two times the tracked asset's daily performance. The fund's investments are financial instruments Proshare's managers believe will further the fund's objectives. TBT is a non-diversified fund, and the index tracked includes publicly-issued U.S Treasury Securities with maturities greater than or equal to 20 years. In addition, the securities must have a face value of $300 million or more.
Savvy investors use the TBT to bet on rising rates. That is why it has been performing commendably recently. The asset under management, AUM, is more than $1.4 billion.
These inverse funds should be added to your watchlist as market uncertainties continue. When I see a bullish sign in the market, I will change my investment strategy. For now, let's short some aspects of the market.
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