The tech-heavy Nasdaq Composite Index has lost its momentum lately on surging yields, which has led to fears of overvaluation. In fact, the tech sector, which outperformed during the pandemic and has significant exposure to the index, has been hit hard.
This is because the sector relies on easy borrowing for superior growth and its value depends heavily on future earnings. Thus, a rise in long-term yields lowers the present value of companies’ future earnings. The 10-year Treasury yield reached 1.47% on Mar 3, up nearly 50 basis points from levels just a month ago. Notably, the Nasdaq 100 Index slumped to a two-month low, bringing its losses from a February peak to about 8% (read: 5 Hot Tech ETFs to Tap on Beaten Down Prices).
The situation has led to rotating out of the high beta and high growth securities to the sectors poised to benefit from an improving economy. The S&P 500 Information Technology Sector Index is down 3.4% over the past month. The other two sectors with the largest exposure to the Nasdaq Index – consumer discretionary and healthcare – have also been beaten down badly in the tech rout. The S&P 500 Consumer Discretionary Sector Index and the S&P 500 Health Care Sector Index fell 6.3% and 2.5%, respectively, in the same time period.
Given the sluggish backdrop, bearish investors may want to go near-term short on the Nasdaq- 100 Index. Fortunately, with the advent of ETFs, there are a number of inverse or leveraged inverse products that offer inverse (opposite) exposure to the index. 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.
Below we highlight the inverse Nasdaq ETFs and some of the key differences among them:
ProShares UltraPro Short QQQ SQQQ
This ETF provides three times inverse exposure to the daily performance of the Nasdaq-100 Index, charging 95 basis points (bps) in annual fees. It has AUM of $1.5 billion and trades in average daily volume of about 69 million shares. SQQQ charges 95 bps per year and has gained 14.7% in a month (read: 6 Inverse ETFs Riding High on Tech Sell-Off This Week).
ProShares UltraShort QQQ QID
This ETF provides two times inverse exposure to the Nasdaq-100 Index. It charges 0.95% in annual fees and trades in average daily volume of 6.2 million shares. It manages $250.9 million in its asset base and has risen nearly 10% in a month.
ProShares Short QQQ PSQ
This fund offers inverse exposure to the daily performance of the Nasdaq-100 Index. It has amassed $616.7 million in its asset base and trades in average daily volume of 4.2 million shares. The ETF charges 95 bps per year and has gained 5% in a month.
Bottom Line
While the strategy is highly beneficial for short-term traders, it could lead to huge losses compared with traditional funds in fluctuating 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) (see: all the Inverse Equity ETFs here).
Still, for ETF investors, who are bearish on the Nasdaq for the near term, either of the above products could make an interesting choice. Clearly, these could be attractive for those with high-risk tolerance, and a belief that the “trend is the friend” in this specific corner of the investing world.
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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.
