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August was a dull month for Wall Street, with all three major indices finishing in the red. The series of bank downgrades and fears of higher rates for a longer-than-expected period took a toll on investors’ sentiment. The S&P 500 had its worst month since February, while the Dow had its worst month since May. The Nasdaq hasn't performed this badly since November of last year.

Notably, the Dow Jones and the tech-heavy Nasdaq Composite Index shed about 2%, while the S&P 500 declined 1.4%.

This resulted in huge demand for inverse or inverse-leveraged ETFs, as these often fetch outsized returns on bearish sentiments in a short span. We have highlighted the five best-leveraged inverse ETFs that piled up handsome gains over the past week amid all the market turmoil. These, however, involve a great deal of risk compared to traditional products.

ETFs such as MicroSectors U.S. Big Banks Index -3X Inverse Leveraged ETN (BNKD - Free Report), MicroSectors Travel -3x Inverse Leveraged ETN (FLYD - Free Report), Direxion Daily S&P Biotech Bear 3x Shares (LABD - Free Report), Daily S&P 500 High Beta Bear 3X Shares (HIBS - Free Report), and Direxion Daily Small Cap Bear 3x Shares (TZA - Free Report) could remain investors’ darlings, provided that sentiment remains volatile.

A slew of strong economic data kept alive fears of higher interest rates for a longer period. U.S. retail sales came in better than expected, rising 0.7% in July. Additionally, inflation rose for the first time in July after 12 straight months of decline.

The Federal Reserve Chair Jerome Powell, at the Jackson Hole Economic Symposium, expressed confidence in continued economic growth in the United States, citing “robust” consumer spending and early signs of a recovery in the housing market. However, the Fed warned that inflation is still too high and that the central bank is prepared to raise interest rates further and keep the borrowing costs high until inflation comes down to the target range of 2%.

Inverse ETFs

These products either create a short position or a leveraged short position in the underlying index through swaps, options, futures contracts, and other financial instruments. Due to their compounding effect, investors can often enjoy higher returns in a short period of time, provided the trend remains a friend.

However, these funds run the risk of huge losses compared to traditional ones in fluctuating or seesawing markets. Further, their performance could vary significantly from the actual performance of the underlying index over a longer period compared to a shorter period (such as weeks or months).

MicroSectors U.S. Big Banks Index -3X Inverse Leveraged ETN (BNKD - Free Report) – Up 30.7%

This fund seeks to offer three times inverse leveraged exposure to the Solactive MicroSectors U.S. Big Banks Index. The benchmark includes 10 U.S. stocks in the banking sector, with the largest free-float market capitalization in equal weights.

The MicroSectors U.S. Big Banks Index -3X Inverse Leveraged ETN has accumulated $17 million in its asset base. It charges 95 bps in annual fees, and it trades in an average daily volume of about 278,000 shares.

MicroSectors Travel -3x Inverse Leveraged ETN (FLYD - Free Report) – Up 19.7%

This fund offers three times (3X or 300%) inverse exposure to the performance of the MerQube MicroSectors U.S. Travel Index, which measures the performance of large, liquid U.S. listed and domiciled companies operating in the RBICS Sub Industries related to travel and tourism. It has gathered $3.7 million in its asset base.

The MicroSectors Travel -3x Inverse Leveraged ETN charges 95 bps in fees per year, and it trades in an average daily volume of 18,000 shares.

Direxion Daily S&P Biotech Bear 3x Shares (LABD - Free Report) – Up 17.8%

This fund seeks to deliver three times the inverse daily performance of the S&P Biotechnology Select Industry Index, which includes domestic companies from the biotechnology industry.

The Direxion Daily S&P Biotech Bear 3x Shares fund has amassed $72.3 million in its asset base, and it has an average daily volume of around 4 million shares. LABD charges investors 95 bps in annual fees.

Daily S&P 500 High Beta Bear 3X Shares (HIBS - Free Report) – Up 16.7%

This fund offers three times inverse exposure to the performance of the S&P 500 High Beta Index. It has gathered $46.3 million in AUM, and it trades in an average daily volume of 227,000 shares.

The Daily S&P 500 High Beta Bear 3X Shares fund charges 95 bps in fees per year from investors.

Direxion Daily Small Cap Bear 3x Shares (TZA - Free Report) – Up 14.1%

This fund provides three times inverse exposure to the Russell 2000 Index, charging 91 bps in fees and expenses. It has been able to manage $407.3 million in its asset base with a heavy average daily volume of 12.5 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 markets.

Still, for ETF investors who are bearish on equities for the near-term, any of the funds discussed above could make for an interesting choice. These could be attractive for those with high-risk tolerance and for those who believe that the “trend is the friend” in this specific corner of the investing world.

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