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Bet on Inverse ETFs as Nasdaq Enters Correction Territory
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The U.S. stock market had a rocky start to 2022 with the tech-heavy Nasdaq Composite Index being the hardest hit. In fact, the benchmark slumped to correction territory (down 10% from the peak) in anticipation of higher bond yields and the Federal Reserve’s tightening monetary policy.
This has resulted in higher demand for inverse or inverse leveraged Nasdaq ETFs as these fetch outsized returns on quick market turns in a short span. Investors could go near-term short on the Nasdaq- 100 Index with ProShares UltraPro Short QQQ (SQQQ - Free Report) , ProShares UltraShort QQQ (QID - Free Report) and ProShares Short QQQ (PSQ - Free Report) (see: all the Inverse Equity ETFs here).
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.
Why Go Short?
This is the fourth time in nearly two years that Nasdaq has entered into correction territory since the coronavirus pandemic shook global markets. Overall, the index logged its 66th correction since 1971.
Most of the decline came due to tech sector sell-off. This is because the tech sector relies on easy borrowing for superior growth and its value depends heavily on future earnings. A rise in long-term yields lowers the present value of companies’ future earnings, sparking fears of overvaluation. Notably, the 10-year U.S. Treasury yield jumped to around 1.87% - its highest level in two years (read: Bet on Inverse Treasury ETFs Now to Play Rise in Yields).
Additionally, the Fed has turned more hawkish than expected in the last minute. The policymakers signaled three rate increases this year and three in the following year as inflation concerns deepened. The probabilities of a March interest rate hike of 0.25% surged to 72%, according to fed futures trading contracts. This will continue to push the yields higher, dampening the appeal for growth stocks and thus pull Nasdaq index down.
Below we highlight the inverse Nasdaq ETFs and some of the key differences among them:
ProShares UltraShort QQQ provides two times inverse exposure to the Nasdaq-100 Index. It also charges 0.95% in annual fees and trades in an average daily volume of 14.2 million shares.
ProShares UltraShort QQQ manages $324.9 million in its asset base.
ProShares Short QQQ offers inverse exposure to the daily performance of the Nasdaq-100 Index. It has amassed $551.2 million in its asset base and trades in an average daily volume of 10.3 million shares (read: Profit From the Tech Sell-Off With These Inverse ETFs).
ProShares Short QQQ charges 95 bps per year.
Bottom Line
While the strategy is highly beneficial for short-term traders, it could lead to huge losses compared with the traditional funds in fluctuating markets. Due to their compounding effect, investors can enjoy higher returns in a short period of time, provided the trend remains a friend.
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).
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Bet on Inverse ETFs as Nasdaq Enters Correction Territory
The U.S. stock market had a rocky start to 2022 with the tech-heavy Nasdaq Composite Index being the hardest hit. In fact, the benchmark slumped to correction territory (down 10% from the peak) in anticipation of higher bond yields and the Federal Reserve’s tightening monetary policy.
This has resulted in higher demand for inverse or inverse leveraged Nasdaq ETFs as these fetch outsized returns on quick market turns in a short span. Investors could go near-term short on the Nasdaq- 100 Index with ProShares UltraPro Short QQQ (SQQQ - Free Report) , ProShares UltraShort QQQ (QID - Free Report) and ProShares Short QQQ (PSQ - Free Report) (see: all the Inverse Equity ETFs here).
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.
Why Go Short?
This is the fourth time in nearly two years that Nasdaq has entered into correction territory since the coronavirus pandemic shook global markets. Overall, the index logged its 66th correction since 1971.
Most of the decline came due to tech sector sell-off. This is because the tech sector relies on easy borrowing for superior growth and its value depends heavily on future earnings. A rise in long-term yields lowers the present value of companies’ future earnings, sparking fears of overvaluation. Notably, the 10-year U.S. Treasury yield jumped to around 1.87% - its highest level in two years (read: Bet on Inverse Treasury ETFs Now to Play Rise in Yields).
Additionally, the Fed has turned more hawkish than expected in the last minute. The policymakers signaled three rate increases this year and three in the following year as inflation concerns deepened. The probabilities of a March interest rate hike of 0.25% surged to 72%, according to fed futures trading contracts. This will continue to push the yields higher, dampening the appeal for growth stocks and thus pull Nasdaq index down.
Below we highlight the inverse Nasdaq ETFs and some of the key differences among them:
ProShares UltraPro Short QQQ (SQQQ - Free Report)
ProShares UltraPro Short QQQ provides three times inverse exposure to the daily performance of the Nasdaq-100 Index, charging 95 bps in annual fees.
ProShares UltraPro Short QQQ has AUM of $1.7 billion and trades in an average daily volume of about 34 million shares.
ProShares UltraShort QQQ (QID - Free Report)
ProShares UltraShort QQQ provides two times inverse exposure to the Nasdaq-100 Index. It also charges 0.95% in annual fees and trades in an average daily volume of 14.2 million shares.
ProShares UltraShort QQQ manages $324.9 million in its asset base.
ProShares Short QQQ (PSQ - Free Report)
ProShares Short QQQ offers inverse exposure to the daily performance of the Nasdaq-100 Index. It has amassed $551.2 million in its asset base and trades in an average daily volume of 10.3 million shares (read: Profit From the Tech Sell-Off With These Inverse ETFs).
ProShares Short QQQ charges 95 bps per year.
Bottom Line
While the strategy is highly beneficial for short-term traders, it could lead to huge losses compared with the traditional funds in fluctuating markets. Due to their compounding effect, investors can enjoy higher returns in a short period of time, provided the trend remains a friend.
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).