The year 2022 has been brutal so far for the stock market, with the S&P 500 Index plunging in bear-market territory. Russia's invasion of Ukraine, tightening monetary policy and surging prices continue to weigh on investor sentiment.
While most of the sectors have been in the red this year, with technology being the hardest hit, energy has remained the outperformer. This has led to higher demand for leveraged and inverse-leveraged ETFs as these have fetched outsized returns on quick market turns in a short span. We highlight a bunch of the best-performing leveraged or inverse leveraged equity ETFs that have more than doubled in the first half of 2022.
These include Daily Dow Jones Internet Bear 3X Shares WEBS, MicroSectors FANG & Innovation -3x Inverse Leveraged ETN BERZ, MicroSectors U.S. Big Oil Index 3X Leveraged ETN NRGU, ProShares UltraPro Short QQQ SQQQ and Direxion Daily S&P Biotech Bear 3x Shares LABD and will remain investors' darlings, provided the sentiments remain bullish.
Investors should note that the S&P 500 is down about 22% this year. If the year ends with this loss, the S&P 500 would register its worst annual decline since 2008 and its second-worst annual decline since 1974. On a total return basis, the index lost 37% in 2008 and 26.5% in 1974 (read: Winning Inverse ETFs in S&P 500's Worst Week Since 2020).
With inflation soaring to a four-decade high, the Fed raised interest rates by 75 bps in its latest FOMC meeting - the biggest interest-rate increase since 1994 - and signaled continued tightening ahead, which could further weigh on stocks. Fed Chair Jerome Powell said another hike of 50 or 75 bps at the next meeting in July is likely.
The latest rounds of data suggest a slowdown in economic activity in the key sectors. Mortgage rates reached their highest level in more than 13 years, while retail sales registered a bigger-than-expected drop in May as record gasoline prices prompted households to cut back on spending.
As the global economy is struggling with skyrocketing inflation and low growth, the World Bank has warned of a recession. The war in Ukraine, lockdowns in China, supply-chain disruptions, and the risk of stagflation are hurting growth. Additionally, energy and food bills have been rising around the world. The World Bank expects growth in the United States to hit 2.5% in 2022, down from 5.7% in 2021 (read: 5 Safe ETFs to Play Amid Recession Fears).
Leveraged and Inverse-Leveraged ETFs
Leveraged and inverse-leveraged ETFs either create a leveraged long/short position, an inverse long/short position, or a leveraged inverse long/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 short period, provided the trend remains a friend.
However, these funds run the risk of huge losses compared to traditional funds in fluctuating or seesawing markets. Further, their performance 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).
Investors should note that these products are suitable only for short-term traders as these are rebalanced on a daily basis. Further, liquidity can be a big problem as it can make the products more expensive than they appear (see: all the Inverse Equity ETFs here).
Daily Dow Jones Internet Bear 3X Shares (WEBS) - Up 227.3%
Daily Dow Jones Internet Bear 3X Shares provides three times inverse play on the Internet corner of the broad technology sector by tracking the Dow Jones Internet Composite Index.
Daily Dow Jones Internet Bear 3X Shares has attracted $61.5 million in its asset base and charges 95 bps in annual fees. The ETF sees an average daily volume of about 338,000 shares.
MicroSectors FANG & Innovation -3x Inverse Leveraged ETN (BERZ) - Up 153%
MicroSectors FANG & Innovation -3x Inverse Leveraged ETN is linked to the three times leveraged inverse performance of the Solactive FANG Innovation Index. The index tracks the stock prices of 15 large-capitalization, highly liquid U.S. technology stocks (read: 5 Inverse ETFs Rallying This Year With Tech Meltdown).
With AUM of $14 million, MicroSectors FANG & Innovation -3x Inverse Leveraged ETN has an expense ratio of 0.95% and trades in an average daily volume of 92,000 shares.
MicroSectors U.S. Big Oil Index 3X Leveraged ETN (NRGU) - Up 121.7%
MicroSectors U.S. Big Oil Index 3X Leveraged ETN provides three times (3X or 300%) leveraged exposure to the Solactive MicroSectors U.S. Big Oil Index, which is equal-dollar weighted and provides exposure to the 10 largest U.S. energy and oil companies.
MicroSectors U.S. Big Oil Index 3X Leveraged ETN has been able to manage $1.7 billion in its asset base, while trading in an average daily volume of 136,000 shares. The expense ratio comes in at 0.95%.
ProShares UltraPro Short QQQ (SQQQ) - Up 115.3%
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 $3.4 billion and trades in an average daily volume of about 118 million shares.
Direxion Daily S&P Biotech Bear 3x Shares (LABD) - 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 $105.1 million in its asset base and has an average daily volume of around 4 million shares. LABD charges investors 94 bps in annual fees.
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