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After an astounding five-month surge, the tech-heavy Nasdaq Composite Index saw a blood bath in the recent trading sessions. The benchmark slumped to the correction territory (down 10% from the peak) in just three days, representing its quickest plunge ever from a record close (read: Don’t Fear Correction: ETF Laggards Are Emerging Leaders).
In fact, the seven biggest U.S. tech stocks — Facebook FB, Amazon.com AMZN, Apple AAPL, Tesla TSLA, Microsoft MSFT, Alphabet GOOGL and Netflix NFLX — have lost more than $1 trillion in value over the past three days. Most of the decline came on the back of concerns over high valuations and a sluggish economic recovery in the wake of the coronavirus pandemic.
Per the Financial Times report last week, SoftBank has built stakes in major U.S. tech companies worth around $4 billion and purchased billions worth of call options in recent months that helped to fuel the sharp ascent for big tech stocks. This news has also pushed tech stocks into a tailspin.
A deadlock in another financial-aid package, budget negotiations and election uncertainty added to the chaos. Further, geopolitics continued to be an overhang on the stocks. In the latest development, President Donald Trump is seeking to curb the U.S. relationship with China, threatening to punish any American companies that create jobs overseas and forbid those that do business in China from winning federal contracts. The Trump administration is also considering another ban on China’s cotton.
The broad market sell-off has resulted in a spike in inverse or inverse leveraged ETFs. These products either create a short position or a leveraged 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 short period of time, provided the trend remains a friend (read: Should You Invest in Tech ETFs After a Sharp Sell-Off?).
However, these funds run the risk of huge losses compared with the traditional ones 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).
We have highlighted the five leveraged inverse ETFs that piled up more than 35% gains over the past three trading sessions, though these involve a great deal of risk when compared to traditional products.
BMO REX MicroSectors FANG+ Index -3X Inverse Leveraged ETN FNGD – Up 47.7%
This note seeks to offer three times inverse leveraged exposure to the NYSE FANG+ Index, which is an equal-dollar weighted index targeting the highly-traded growth stocks of next-generation technology and tech-enabled companies in the technology and consumer discretionary sectors. The ETN has accumulated $96.9 million since then. It charges 95 bps in annual fees and trades in average daily volume of 2.2 million shares.
Daily Dow Jones Internet Bear 3X Shares WEBS – Up 38.8%
This fund provides three times inverse play on the Internet corner of the broad technology sector by tracking the Dow Jones Internet Composite Index. It has attracted $3.2 million in its asset base and charges 95 bps in annual fees. The ETF sees an average daily volume of more than 164,000 shares.
Direxion Daily Technology Bear 3x Shares TECS – Up 38.5%
This product provides three times inverse exposure to the daily performance of the Technology Select Sector Index. It has amassed about $63.7 million in its asset base while charging 95 bps in fees per year from investors. Volume is good as it exchanges around 2.6 million shares a day on average (read: ETF Winners & Losers From Wall Street’s Worst Day Since June).
Direxion Daily Semiconductor Bear 3x Shares SOXS – Up 37.4%
This ETF provides three times inverse exposure to the PHLX Semiconductor Sector Index. It charges 0.95% in annual fees and trades in average daily volume of 6.7 million shares. It manages $108.9 million in its asset base.
ProShares UltraPro Short QQQ SQQQ – Up 37%
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 $1.6 billion and trades in average daily volume of about 32.7 million shares. SQQQ charges 95 bps per year.
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 the tech sector 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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Microsoft Corporation (MSFT): Free Stock Analysis Report
Amazon.com, Inc. (AMZN): Free Stock Analysis Report
Apple Inc. (AAPL): Free Stock Analysis Report
Netflix, Inc. (NFLX): Free Stock Analysis Report
Tesla, Inc. (TSLA): Free Stock Analysis Report
Facebook, Inc. (FB): Free Stock Analysis Report
Alphabet Inc. (GOOGL): Free Stock Analysis Report
ProShares UltraPro Short QQQ (SQQQ): ETF Research Reports
Direxion Daily Technology Bear 3X Shares (TECS): ETF Research Reports
Direxion Daily Semiconductor Bear 3X Shares (SOXS): ETF Research Reports
MicroSectors FANG Index 3X Inverse Leveraged ETNs (FNGD): ETF Research Reports
Direxion Daily Dow Jones Internet Bear 3X Shares (WEBS): ETF Research Reports
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.