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Wall Street logged in its worst day since the early months of the pandemic due to rounds of disappointing earnings from some of the major retailers, underscoring that inflation is hurting corporate profits. Additionally, tightening monetary policy is weighing on economic growth,

The bearish sentiments have raised the appeal for inverse or inverse-leveraged ETFs as these fetch outsized returns on bearish sentiments in a short span. ProShares Ultra VIX Short-Term Futures ETF (UVXY), BMO REX MicroSectors FANG+ Index -3X Inverse Leveraged ETN (FNGD), Direxion Daily Semiconductor Bear 3x Shares (SOXS), Direxion Daily S&P Biotech Bear 3x Shares (LABD) and ProShares UltraPro Short QQQ (SQQQ) outperformed on the May 18 session and might continue their strong performance if sentiments remain the same.

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.

The S&P 500 fell 4% on May 18, while the Dow Jones Industrial lost 3.6%. This marks the worst one-day loss for both indices since June 2020. Target Corp. (TGT) tumbled more than 20% in its worst rout since 1987, after it trimmed its profit forecast. Retailers from Walmart Inc. (WMT) to Macy’s Inc. (M) were caught in the rout. As such, the consumer staples and consumer discretionary sectors lagged.

Meanwhile, the Nasdaq 100 fell the most among the major benchmarks, plunging more than 5% as growth-related tech stocks sank.

ProShares Ultra VIX Short-Term Futures ETF – Up 21.6%

ProShares Ultra VIX Short-Term Futures ETF offers exposure to one and one-half times (1.5X) the daily performance of the S&P 500 VIX Short-Term Futures Index. It seeks to profit from increases in the expected volatility of the S&P 500, as measured by the prices of VIX futures contracts.

ProShares Ultra VIX Short-Term Futures ETF has accumulated $771.4 million and charges 95 bps in annual fees. It trades in an average daily volume of 74.1 million shares.

BMO REX MicroSectors FANG+ Index -3X Inverse Leveraged ETN – Up 15%

BMO REX MicroSectors FANG+ Index -3X Inverse Leveraged ETN seeks to offer three times inverse leveraged exposure to the NYSE FANG+ Index, an equal-dollar weighted index, targeting the highly-traded growth stocks of next-generation technology and tech-enabled companies in the technology and consumer discretionary sectors.

BMO REX MicroSectors FANG+ Index -3X Inverse Leveraged ETN has accumulated $102.4 million in its asset base. It charges 95 bps in annual fees and trades in an average daily volume of 774,000 shares.

Direxion Daily Semiconductor Bear 3x Shares – Up 14.9%

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 $239.7 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 S&P Biotech Bear 3x Shares – Up 14.8%

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 $107.5 million in its asset base and has an average daily volume of around 4 million shares. LABD charges investors 94 bps in annual fees.

ProShares UltraPro Short QQQ - Up 14.5%

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 billion and trades in an average daily volume of about 104 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.