5 Best Leveraged/Inverse ETFs at Halfway Q1

At halfway Q1, Wall Street is experiencing huge volatility with growth stocks being beaten down badly. While an improving economy, rising consumer confidence and solid corporate earnings are acting as catalysts, inflationary pressures, tightening policies from the central banks worldwide and rising tensions between Moscow and the West over Ukraine have taken a toll on investors’ sentiment.

In such a scenario, the appeal for leveraged and inverse-leveraged ETFs has increased as these have fetched outsized returns on quick market turns in a short span. MicroSectors U.S. Big Oil Index 3X Leveraged ETN NRGU, MicroSectors FANG & Innovation -3x Inverse Leveraged ETN BERZ, Daily Dow Jones Internet Bear 3X Shares WEBS, Direxion Daily S&P Biotech Bear 3x Shares LABD and ProShares UltraPro Short QQQ SQQQ have been outperforming and might continue their strong performance if sentiments remain the same.

Current Market Trends

The U.S. consumer price index jumped 7.5% year over year in January, marking the biggest 12-month gain since February 1982. The high inflation has set the stage for the first interest rate hike in the United States for this year as early as March. Wall Street analysts are predicting as many as seven rate hikes this year (read: Should Income Investors Look at MLP ETFs as Inflation Spikes?).

Meanwhile, the latest move by Russia’s president Vladimir Putin has escalated a conflict that could unleash a major war with the West. Putin formally recognized the independence of east Ukraine's two separatist republics and then ordered the deployment of Russian troops to two breakaway regions of Ukraine. If Putin tries to invade Ukraine, the United States and its European allies have warned that they will impose tough sanctions against Russia.

Sky News reported that U.K. prime minister Boris Johnson would unveil a "significant" package of sanctions on Russia. CNN reported that U.S. President Joe Biden would impose new sanctions on trade and financing in the two territories recognized by Putin.

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, 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 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 they are rebalanced on a daily basis. Further, liquidity can be a big problem as it can make the products more expensive than what they appear (see: all the Inverse Equity ETFs here).

Still, ETF investors seeking to tap abrupt movements can go long or short in the near term.

ETFs That Gained the Most

MicroSectors U.S. Big Oil Index 3X Leveraged ETN (NRGU) – Up 84.2%

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 (read: Sector ETFs to Benefit/Lose as Oil May Hit $120 Soon).

MicroSectors U.S. Big Oil Index 3X Leveraged ETN has been able to manage $1.1 billion in its asset base, while trading in an average daily volume of 286,000 shares. Expense ratio comes in at 0.95%.

MicroSectors FANG & Innovation -3x Inverse Leveraged ETN (BERZ) – Up 67.4%

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 U.S. technology stocks.

With AUM of $4.1 million, MicroSectors FANG & Innovation -3x Inverse Leveraged ETN has an expense ratio of 0.95% and trades in an average daily volume of 19,000 shares.

Daily Dow Jones Internet Bear 3X Shares (WEBS) – Up 63.9%

Daily Dow Jones Internet Bear 3X Shares provides a 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 $12.5 million in its asset base and charges 95 bps in annual fees. The ETF sees an average daily volume of about 136,000 shares.

Direxion Daily S&P Biotech Bear 3x Shares (LABD) – Up 61.8%

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 domestic companies from the biotechnology industry.

Direxion Daily S&P Biotech Bear 3x Shares has amassed $61.2 million in its asset base and has an average daily volume of around 3.9 million shares. LABD charges investors 95 bps in annual fees.

ProShares UltraPro Short QQQ (SQQQ) – Up 45.8%
 
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 (read: Rate Hikes to Weigh on Nasdaq: Go Short With These ETFs).

ProShares UltraPro Short QQQ has AUM of $2.5 billion and trades in an average daily volume of about 48.5 million shares.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.