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Wall Street is caught in a vicious circle of trading this year triggered by inflationary pressures, Fed’s tightening policy and the war in Ukraine. The combination of factors has led to a steep sell-off in the growth sectors like technology, raising the appeal for inverse or inverse-leveraged ETFs.

Inverse or inverse leveraged ETFs fetch outsized returns on bearish sentiments in a short span. While there are several options in the space, we highlight five ETFs that have been enjoying a huge rally amid the current market trends. These include Direxion Daily S&P Biotech Bear 3x Shares, MicroSectors FANG & Innovation -3x Inverse Leveraged ETN, Direxion Daily Semiconductor Bear 3x Shares, Direxion Daily Cloud Computing Bear 2X Shares and ProShares UltraPro Short QQQ.

Inverse and inverse-leveraged ETFs either create an inverse short position or a leveraged inverse short position in the underlying index through the use of swaps, options, futures contracts and other financial instruments. Due to their compounding effect, investors can enjoy higher returns in a very short time, provided the trend prevails.

Current Market Trends

Soaring yields and hawkish commentary from the Federal Reserve have wiped out more than $1 trillion every month this year from the tech-heavy Nasdaq 100 Index. More than $1 trillion was wiped out in the first week of April, followed by losses of $1.5 trillion in March, $1.7 trillion in February and a whopping $3 trillion in January.

This is especially true as higher interest rates reduce the present value of future earnings, weighing especially on shares of fast-growing companies. The trend is likely to continue as Treasury yields hit three-year highs on bets of aggressive interest rate hikes. The Fed is now expected to hike rates by 50 basis points at its May and June meetings to curb rapid inflation. Fed funds futures traders expect the Fed’s benchmark rate to increase to 1.28% in June and 2.67% next February from the current 0.33%.

Direxion Daily S&P Biotech Bear 3x Shares (LABD) – Up 60.4%

Direxion Daily S&P Biotech Bear 3x Shares seeks to deliver three times the inverse daily performance of the S&P Biotechnology Select Industry Index, which includes the domestic companies from the biotechnology industry.

Direxion Daily S&P Biotech Bear 3x Shares has amassed $71.8 million in its asset base and has an average daily volume of around 5 million shares. LABD charges investors 94 bps in annual fees.

MicroSectors FANG & Innovation -3x Inverse Leveraged ETN (BERZ) – Up 49%

MicroSectors FANG & Innovation -3x Inverse Leveraged ETN is linked to the three times leveraged inverse performance of the Solactive FANG Innovation Index. The index tracks the stock prices of 15 large-capitalization highly liquid U.S. technology stocks.

With AUM of $7.4 million, MicroSectors FANG & Innovation -3x Inverse Leveraged ETN has an expense ratio of 0.95% and trades in an average daily volume of 58,000 shares.

Direxion Daily Semiconductor Bear 3x Shares (SOXS) – Up 46.9%

Direxion Daily Semiconductor Bear 3x Shares targets the semiconductor corner of the technology sector with three times inverse leveraged exposure to the ICE Semiconductor Index.

Direxion Daily Semiconductor Bear 3x Shares has amassed about $214.3 million in its asset base while charging 95 bps in fees per year. Volume is good as it exchanges 66.7 million shares per day on average.

Direxion Daily Cloud Computing Bear 2X Shares (CLDS) - Up 44.2%

Direxion Daily Cloud Computing Bear 2X Shares targets the cloud-computing segment of the broad technology sector, offering two times inverse exposure to the performance of the Indxx USA Cloud Computing Index.

With AUM of $15.4 million, Direxion Daily Cloud Computing Bear 2X Shares has an expense ratio of 0.95% and trades in an average daily volume of 7,000 shares.

ProShares UltraPro Short QQQ (SQQQ) - Up 36%

ProShares UltraPro Short QQQ provides three times inverse exposure to the daily performance of the Nasdaq-100 Index, charging 95 bps in annual fees. The index measures the performance of the 100 largest domestic and international non-financial companies listed on The Nasdaq Stock Market based on market capitalization.

ProShares UltraPro Short QQQ has AUM of $3.1 billion and trades in an average daily volume of about 90.2 million shares.

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 compared to a shorter period (such as weeks or months) due to their compounding effect.

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 a high risk tolerance, and a belief that the “trend is the friend” in this specific corner of the investing world.