7 Inverse ETFs Riding High On Nasdaq Sell-Off

The tech-heavy Nasdaq Composite Index resumed its decline with the index plunging 2.6% on the May 10 trading session to post its worst day since March. The selling pressure were created by a sell-off in the technology sector, especially in the big tech titans.

This is especially true, as the ongoing economic recovery post-pandemic has led to a surge in prices for broad-based commodities, sparking fears of inflation. This could prompt the Federal Reserve to tighten policies earlier than expected, dampening the appeal for stocks, which rely on easy borrowing for superior growth and whose valuations depend heavily on future earnings. As such, investors are rotating out of the technology names to the sectors poised to benefit from the recovering economy.

Market Impact

Semiconductor stocks were at the forefront of the Nasdaq’s heavy decline with Align Technology (ALGN - Free Report), Lam Research (LRCX - Free Report), Qorvo (QRVO - Free Report), and Qualcomm (QCOM - Free Report) falling more than 6%. Big tech stocks like Facebook (FB - Free Report) lost more than 4%, while Amazon (AMZN - Free Report) and Netflix (NFLX - Free Report) dropped over 3% each. Alphabet (GOOGL - Free Report) slid more than 2%.

The 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.

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).

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Disclosure: Zacks.com contains statements and statistics that have been obtained from sources believed to be reliable but are not guaranteed as to accuracy or completeness. References to any ...

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