Thanks to heightened volatility and uncertainty, the leveraged and inverse leveraged space has grabbed investors’ attention at the start of October. This is because investors grabbed products in this space to magnify returns on quick market turns.
While the dual tailwinds of strong corporate earnings and a booming economy will likely keep the positive momentum alive in the stock market, soaring U.S. yields have taken a toll on investors’ appetite for U.S. equities, which have been outperforming international equities this year (read: Treasury Yields at New 7-Year High: ETF Strategies to Play).
Additionally, the steep sell-off in Chinese equities has made investors jittery. The People’s Bank of China’s efforts to spur economic growth by cutting the reserve requirement ratios by 100 basis points effective Oct 15 failed to revive confidence in the world’s second largest economy amid the escalating tariff dispute with the United States. The political turbulence in Italy added to the woes as the war of words between Rome and the European Union over the country’s budget escalated.
Further, the ongoing troubles in emerging markets especially in Argentina and Turkey, chances of auto tariffs on other countries, Iran oil sanctions, another budget deadline and the mid-term U.S. election in November are also weighing on global stocks.
All these have resulted in huge demand for leveraged or inverse leveraged ETFs as investors seek to register big gains in a short span. These products either create a leveraged long/short position, an inverse long/short position or a leveraged inverse long/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 very short period of time provided the trend remains a friend.
However, these funds run the risk of huge losses compared to 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).
Still, we have highlighted seven leveraged/inverse products that have been crushing the market to start the new quarter though these involve a great deal of risk when compared to traditional products. This trend might continue at least for the near term if the global sentiments remain the same (read: Leveraged ETFs: How Do They Work and What’s Hot Now?).
Brazilian stocks are the bright spots to start the final quarter of 2018 on the back of election optimism. In the first round of the country’s presidential election, far-right candidate Jair Bolsonaro garnered 46.7% of the votes while former Sao Paulo mayor Fernando Haddad came in second with 28.5%. The ETF creates a three times (3x or 300%) long position in the MSCI Brazil 25/50 Index. It has amassed about $351.5 million in its asset base while charging 95 bps in fees per year from investors. Volume is solid as it exchanges around 2.4 million shares a day on average.
Biotech stocks have been victim of the broad decline in the U.S. stock market. The product seeks to deliver three times the inverse daily performance of the S&P Biotechnology Select Industry Index. The fund has amassed $65.4 million in its asset base and average daily volume of 1.4 million shares. It charges investors 95 bps in annual fees and expenses.
Rising interest rates in the United States have dulled the appeal for the emerging market stocks, pushing them to 17-month lows. This ETF offers three times inverse exposure to the MSCI Emerging Markets Index, charging investors 95 bps in annual fees. It has amassed about $102.9 million in its asset base while trading in good volumes of 259,000 shares a day on average (read: Emerging Market Currencies Falling: These ETFs Are Still Hot).
Chinese stocks have been hit hard owing to the struggling economy in the face of ongoing trade tariff dispute with the United States. This fund provides three times (300%) the inverse return of the FTSE China 50 Index. It has AUM of around $99.8 million and sees good trading volume of 219,000 shares a day on average. Expense ratio comes in at 0.95%.
Natural gas price and the products tracking this commodity are on fire lately driven by lower U.S. stockpiles, higher-than-usual power demand during a warm autumn and nuclear power plant outages. UGAZ seeks to deliver three times the daily return of the natural gas futures contracts, charging 1.65% in annual fees. It has amassed $356 million and trades in volume of 1.6 million shares a day on average.
This product provides three times inverse exposure to the Russell 2000 Index, charging 95 bps in fees and expenses. It has been able to manage $328.3 million in its asset base with heavy average daily volume of 8.6 million shares (read: 6 Best Performing Leveraged ETFs of September).
This note offers two times exposure to the S&P 500 VIX Short-Term Futures Index. TVIX is popular with average daily volume of around 7.6 million shares and AUM of about $492.8 million. Expense ratio came in much higher at 1.65%.
Investors should note that these products are suitable only for short-term traders as these are rebalanced on a daily basis. Further, liquidity can be the biggest problem for these products that could make them more expensive than they appear (see: all the Inverse Equity ETFs here).
Still, ETF investors seeking to tap abrupt movements can go long or short in the near term.
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