Wall Street is facing rising pressure as the new administration’s trade policies fuel economic uncertainty. U.S. President Donald Trump has announced more aggressive-than-expected tariffs on major trading partners, heightening fears of a global trade war.
Markets have reacted sharply to the announcement, with major indices taking a deep dive. The tech-heavy Nasdaq Composite Index led the sell-off, plummeting 4.8% in early trading today, while the Dow Jones tumbled more than 1,500 points or 3.7%. The S&P 500 declined 4%. With this, Trump’s sweeping new round of tariffs has wiped out nearly $1.7 trillion from the S&P 500 Index at the start of trading today. Companies whose supply chains are heavily reliant on overseas manufacturing have suffered the most.
This has resulted in a spike for inverse or inverse leveraged ETFs as these have fetched outsized returns on quick market turns in a short span. While there are several options in the space, we have highlighted five ETFs that could be compelling choices to play the current bearish trends. These are ProShares UltraPro Short QQQ SQQQ, ProShares UltraPro Short S&P500 SPXU, ProShares UltraPro Short Dow30 SDOW, Direxion Daily Magnificent 7 Bear 1X Shares QQQD and Direxion Daily Technology Bear 3x Shares TECS.
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, future contracts and other financial instruments. Due to their compounding effect, investors can enjoy higher returns in a very short period of time, provided the trend prevails (see: all the Inverse Equity ETFs here).
Yesterday, Trump unveiled a sweeping 10% baseline tariff on all U.S. imports, effective April 5, alongside significantly higher duties on key trading partners. The new tariffs include a 34% rate on China, 20% on the European Union, 46% on Vietnam, 32% on Taiwan and 26% on India, all set to take effect on April 9. In total, approximately 185 countries will be impacted, pushing U.S. tariff rates to their highest level in over a century (read: New Tariff Worsens Trade War Fears: 5 Safe Haven ETFs to Buy).
China has urged the United States to withdraw its latest tariffs and has vowed countermeasures to protect its economic interests. Meanwhile, the European Union is preparing retaliatory measures should negotiations fail.
The new administration also confirmed that a 25% tariff on global car and truck imports will proceed as planned today, with additional duties on automotive parts set to take effect on May 3. The escalating trade tensions increase the risk of a full-scale trade war, which could slow global economic growth. The steep tariffs have raised concerns about higher prices, with the industrial, retail, consumer and automotive sectors feeling the impact.
ProShares UltraPro Short QQQ (SQQQ)
ProShares UltraPro Short QQQ provides three times (3X or 300%) 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 $2.6 billion and trades in an average daily volume of about 67 million shares.
ProShares UltraPro Short S&P500 (SPXU)
ProShares UltraPro Short S&P500 provides three times inverse exposure to the S&P 500 Index. It charges an annual fees of 89 bps per year. ProShares UltraPro Short S&P500 trades in solid volume, exchanging around 13 million shares per day on average. It has amassed $600.4 million in its asset base.
ProShares UltraPro Short Dow30 (SDOW)
ProShares UltraPro Short Dow30 provides three times inverse exposure to the daily performance of the Dow Jones Industrial Average. It has AUM of $237.2 million and trades in an average daily volume of about 3 million shares. It charges 95 bps per year.
Direxion Daily Magnificent 7 Bear 1X Shares (QQQD)
Direxion Daily Magnificent 7 Bear 1X Shares seeks the inverse of the performance of the Indxx Magnificent 7 Index, charging 45 bps in annual fees from investors. It has accumulated $8.8 million in its asset base and trades in an average daily volume of 70,000 shares (read: Can the Tide Turn for ‘Magnificent Seven’ Stocks? ETFs in Focus).
Direxion Daily Technology Bear 3x Shares (TECS)
Direxion Daily Technology Bear 3x Shares provides three times inverse exposure to the daily performance of the Technology Select Sector Index. It has amassed approximately $85.9 million in its asset base, charging investors 91 basis points in fees per year. Volume is solid as it exchanges around 863,000 shares a day on average (read: 5 Leveraged/Inverse ETFs That Gained in Double Digits in March).
While the strategy is highly beneficial for short-term traders, it could lead to huge losses compared with traditional funds in fluctuating markets. Theperformance of these ETFs could vary significantly from the actual performance of their underlying index over a longer period when compared to a shorter period (such as weeks or months). Further, liquidity can be a big problem as it can make the products more expensive than they appear.
Still, for ETF investors who are bearish on equities for the near term, any of the above products could make an interesting choice. These could be attractive for those with high-risk tolerance and those who believe that the “trend is the friend” in this specific corner of the investing world.
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ProShares UltraPro Short S&P500 (SPXU): ETF Research Reports
ProShares UltraPro Short QQQ (SQQQ): ETF Research Reports
This article originally published on Zacks Investment Research (zacks.com).
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