Inverse ETFs Gaining More Than 20% In September

The month of September has been brutal for the U.S. stock market with the S&P 500 Index on track for its sharpest decline in September since 2002, according to Dow Jones Market Data.

The combination of lofty valuation, lack of additional fiscal stimulus package, election uncertainty and rising U.S.-China tensions have weighed on investors’ sentiment. Resurgence in COVID-19 cases in the United States and Europe has sparked concerns over the global economic recovery and lockdown measures. Most parts of Europe have already re-imposed restriction measures. The fight over a Supreme Court nominee to replace Justice Ruth Bader Ginsburg and allegations of money laundering against big banks also added to the chaos.

This has resulted in strong demand for 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 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 some leveraged inverse ETFs from different corners of the stock market that have piled up more than 20% gains this month, though these involve a great deal of risk when compared to traditional products. This uptrend might continue, at least for the near term, if sentiments remain the same.

MicroSectors U.S. Big Oil Index -3X Inverse Leveraged ETN (NRGD - Free Report) – Up 55.2%

NRGD offers three times inverse exposure to the Solactive MicroSectors U.S. Big Oil Index. The ETN has accumulated $15 million in its asset base. It charges 95 bps in annual fees and trades in average daily volume of about 51,000 shares.

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William K. 4 weeks ago Member's comment

Certainly it is valuable to understand the risks involved with some investment choices. Thanks for some education.