S&P 500 Near Bear Market: Inverse ETFs in Focus

Wall Street has struggled to find a footing this year, with the S&P 500 now on the brink of a bear market. The benchmark has fallen more than 18% from its all-time high and might slip into bear territory if the loss deepens to 20%.

The bearish trend is likely to continue, with some analysts expecting bigger drops. On this note, Bank of America said the S&P 500 could tumble another 28% before the bear market ends in October as concerns over sky-high inflation, rising interest rates and a darkening economic outlook continue to weigh on the market. As such, investors should bet against the market surge.

To tap this trend, investors could easily go short on the S&P 500 Index, at least in the near term, with the help of inverse or leveraged inverse ETFs that offer inverse (opposite) exposure to the index. ProShares Short S&P500 ETF SH, Direxion Daily S&P 500 Bear 1X Shares SPDN, ProShares UltraShort S&P500 ETF SDS, ProShares UltraPro Short S&P500 SPXU and Direxion Daily S&P 500 Bear 3x Shares SPXS are currently the available choices.

The broad sell-off has been ongoing for the past six months and will likely continue to do so given the combination of negative factors. Inflation jumped 8.3% year over year in April. Though it is down from an 8.5% year-over-year increase in March, it still marks the second-highest inflation in four decades and an ongoing burden for families, especially lower-income Americans (read: ETFs to Gain As Inflation Remains Second Highest in 4 Decades).

Fed Chair Jerome Powell has raised interest rates by 50 bps in the latest FOMC meeting and signaled that it would keep hiking at the same pace over the next couple of meetings. The hike marks the biggest interest-rate increase since 2000. The inflation data instills Fed’s plan to raise rates aggressively. Markets are betting that the Fed move could trigger a recession as higher rates, meaning higher loan rates for consumers and businesses, including mortgages, credit cards and auto loans, which would slow down the economy by forcing Americans to cut back on spending.

Further, the ongoing conflict between Russia and Ukraine is leading to supply constraints and worsening disruptions to global food and energy markets, thereby leading to a spike in prices. Adding to the chaos is the COVID-19 surge in China and the resultant lockdown that has led to global growth concerns.

We profiled the ETFs below:

ETFs to Bet On

ProShares Short S&P500 ETF (SH)

ProShares Short S&P500 ETF provides unleveraged inverse exposure to the daily performance of the S&P 500 index. It is the most popular and liquid ETF in the inverse equity space, with AUM of $2.3 billion and an average daily volume of 38.9 million shares. ProShares Short S&P500 ETF charges 88 bps in annual fees.

Direxion Daily S&P 500 Bear 1X Shares (SPDN)

Direxion Daily S&P 500 Bear 1X Shares also offers unleveraged inverse exposure to the daily performance of the S&P 500 Index. It has accumulated $353.6 million in its asset base while trading in an average daily volume of 3.3 million shares. Direxion Daily S&P 500 Bear 1X Shares is cheap relative to the other inverse products as it charges just 45 bps in annual fees (read: 5 Stocks in S&P 500 ETF Defying Losing Streak Since 2011).

ProShares UltraShort S&P500 ETF (SDS)

ProShares UltraShort S&P500 ETF seeks two times (2X) leveraged inverse exposure to the index, charging 90 bps in fees. It is also relatively popular and liquid, having amassed nearly $812.6 million in AUM and nearly 13 million shares in average daily volume.

ProShares UltraPro Short S&P500 (SPXU)

Investors having a more bearish view and higher risk appetite could find SPXU interesting as the fund provides three times (3X) inverse exposure to the index. The ETF charges a fee of 90 bps per year. Trading volume is solid, exchanging around 26.5 million shares per day on average. It has amassed $641.8 million in its asset base.

Direxion Daily S&P 500 Bear 3x Shares (SPXS)

Like SPXU, this product also provides three times inverse exposure to the index but has 5 bps higher fees. It trades in a solid volume of about 21 million shares and has AUM of $488.6 million.

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 seesawing markets. Further, their performances could vary significantly from the actual performance of their underlying index over a longer period when compared to a shorter period (such as weeks or months) due to their compounding effect (see: all the Inverse Equity ETFs here).

Still, for ETF investors bearish on equities for the near term, either of the above products could make an interesting choice. Clearly, these could be intriguing 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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ProShares UltraShort S&P500 (SDS): ETF Research Reports
 
ProShares UltraPro Short S&P500 (SPXU): ETF Research Reports
 
ProShares Short S&P500 (SH): ETF Research Reports
 
Direxion Daily S&P 500 Bear 1X Shares (SPDN): ETF Research Reports
 
Direxion Daily S&P 500 Bear 3X Shares (SPXS): ETF Research Reports
 
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