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Seven Inverse ETFs for the Chaotic Bear

From glancing at the headlines, the concept of acquiring inverse ETFs – that is, exchange-traded funds that rise in value as their underlying securities, assets or sectors fall – doesn’t seem very relevant. After all, the September jobs report came in hotter than expected. More people with more jobs, what could go wrong?

Well, plenty. One must understand the broader context before rushing into the equities sector on the long side of the trade. Since the initial post-pandemic recovery process, the economy has been burdened with skyrocketing inflation. In response, the Federal Reserve aggressively hiked benchmark interest rates. Of course, doing so raised borrowing costs, which hurt businesses’ expansionary endeavors.

To be fair, a strong labor print is typically welcome news. However, that’s the last thing the Fed wanted in its battle against escalating consumer prices. Therefore, more rate hikes – and perhaps aggressive ones at that – could be in our future. That probably won’t bode well for stocks, thus cynically incentivizing the below inverse ETFs.

ProShares Short S&P500 (SH)

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One of the most popular inverse ETFs available, the ProShares Short S&P500 (NYSEARCA:SH) seeks daily investment results that correspond to the inverse (1X) of the daily performance of the benchmark S&P 500 index. While the exposure is only 1X, the daily resetting of the SH and other funds on this list means that you should only be exposed on a short-term basis.

If you understand the nature of the process, the SH could be an intriguing way to hedge your bets. For example, since the start of the year, SH dipped more than 10% in market value. On the other hand, the S&P 500 popped up nearly 13% during the same period. However, the benchmark index slipped more than 3% in the trailing month. In contrast, the SH is up nearly 3%.

As you can see, inverse ETFs don’t always provide the exact inverse performance of the underlying asset/index. However, it’s a convenient mechanism for shorting the market without having to engage in options trading.

ProShares Short Financials (SEF)

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Among the compelling aspects of acquiring inverse ETFs is their diverse offerings. A case in point is the ProShares Short Financials (NYSEARCA:SEF). Per its prospectus, the SEF seeks daily investment results – prior to fees and expenses – that correspond to the inverse (1X) of the daily performance of the S&P Financial Select Sector Index.

Although the narrative associated with the ProShares Short Financials is rather aggressive, it’s not completely unreasonable. Yes, the banking sector has largely stabilized from the earlier sector crisis. However, the AP reported in early May that the crisis isn’t over yet. Presumably, a more aggressively hawkish Fed just might be the negative catalyst that sends SEF higher.

Since the January opener, SEF only gained less than 1%. However, it’s the recent performance that raises eyebrows. In the trailing one-month period, SEF swung up nearly 3%. Compare that to the Financial Select Sector SPDR Fund (NYSARCA:XLF), which lost almost 4% during the aforementioned period.

ProShares UltraShort S&P500 (SDS)

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Finance Mind

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Now, some of you may have an incredibly strong conviction that the equities sector may be due for a correction. For the confident bear, the ProShares UltraShort S&P500 (NYSEARCA:SDS) might be the ticket to success. According to its prospectus, the SDS seeks to correspond its performance to the 2X inverse of the daily performance of the S&P 500.

Basically, you’ll get more rewards if you time the downside of the market correctly and more pain if you don’t. Remember what I said about short-term exposure only? That applies doubly so for 2X inverse ETFs. With the daily resetting and the underlying time decay vulnerability, SDS can badly puncture your portfolio if you’re not on top of things.

As an example, since the beginning of this year, the SDS lost almost 21% of its market value. We’re not talking about a true inverse 2X ratio relative to the S&P 500, unfortunately. However, in the trailing one-month period, SDS gained just over 6%. That’s difficult to overlook.

ProShares UltraShort QQQ (QID)

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Staying in the negative 2X realm for now, investors may recognize that certain sectors appear overheated relative to others. Of course, I’m thinking about the technology space. Yes, artificial intelligence is amazing and all that sweet jazz. But what if sentiment is overcooked? You can put your money where your mouth is with the ProShares UltraShort QQQ (NYSEARCA:QID).

Per its prospectus, the QID seeks daily investment results – before fees and expenses – that correspond to the inverse 2X performance of the Nasdaq-100 index. Again, I’m going to warn the readers: the combo of daily resetting, time decay and other factors for 2x inverse ETFs can be treacherous. You don’t want to enter into this sector without educating yourself on the risks.

For instance, QID is down a shocking 49% since the start of this year. So, if you had a conviction that the tech sector would melt down in January, the only thing that collapsed would have been your portfolio. Still, the QID picked up a bit over 3% in the trailing month. It’s possible that a bearish resurgence is coming.

ProShares UltraPro Short S&P500 (SPXU)

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Okay, amid any investment demographic, there will be a segment of the population that will be extremely confident. So much so that they’re willing to throw down all-or-nothing wagers. At this point, I’m going to issue a warning: inverse ETFs are risky, 2X are even more so, and 3X, well, the description I would give would probably lead to my cancellation. It’s bad.

However, if you truly understand the risks involved and want to go all in, then the ProShares UltraPro Short S&P500 (NYSEARCA:SPXU) could be for you. According to its prospectus, the SPXU attempts to correspond to the 3X inverse performance of the S&P 500 index. Interestingly, the year-to-date print of the SPXU isn’t as bad as some other inverse ETFs, losing “only” 31%.

Part of the mitigation of the downside – if you can even call it that – is its recent upside performance. In the past one-month period, UltraPro Short gained more than 9% of market value. If investors respond poorly to the monetary policy implications of the jobs report, SPXU might be a big winner.

Direxion Daily Small Cap Bear 3X Shares (TZA)

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Jeen Hao

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When targeting negative opportunities, the Direxion Daily Small Cap Bear 3X Shares (NYSEARCA:TZA) might seem an enticing wager. For full disclosure, it’s possible to find hidden gems in this overlooked space. However, as a general rule of thumb, small-capitalization companies suffer from credibility challenges. Therefore, if a broader downturn materializes, this segment may suffer disproportionately.

Now, that might seem like a signal to bet on TZA. Based on its prospectus, the Small Cap Bear 3X seeks daily investment results – before fees and expenses – of 3X the inverse of the daily performance of the Russell 2000 index. However, the TZA presents high risks. For instance, the underlying Russell 2000 index dipped 0.3% since the January starter. However, the TZA lost almost 8% during the same period.

Still, on the other end of the spectrum, what gets intriguing about TZA is its recent performance. Just in the past one-month period, TZA stormed to a ridiculous gain of 18%. And that’s on the Russell 2000 dipping 5.7% during the same frame. So, TZA could work out for the high-conviction bear.

Direxion Daily MSCI Emerging Markets Bear 3X Shares (EDZ)

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Perhaps the most controversial idea among inverse ETFs, the Direxion Daily MSCI Emerging Markets Bear 3X Shares (NYSEARCA:EDZ) could be intriguing or it could be a devastatingly poor trade; it depends on your perspective and your conviction. Presumably, if the U.S. falls into recession, the downcycle could impact many other countries, including emerging markets.

However, not everybody believes in this thesis. Earlier this year, Bloomberg noted that investors sought shelter in emerging markets because of their underlying growth potential. So, it’s possible that if the U.S. equities sector suffers, institutional money could flow into developing economies. If so, that would be positive for the bulls but not so much for the stakeholders of the EDZ.

Still, the data seems to be favoring the pessimists. Since the start of the year, EDZ only popped its head slightly over parity. However, in the trailing one-month period, the fund gained over 7% of its value. So, it may be worth a peek for speculators. Just be aware of the risks associated with time decay and other “administrative” headwinds.

On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.


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