Booming Markets and Bust-Proof ETFs
When markets are moving toward the overbought – as they have over the past few days – some of the biggest edges in the stock market are in ETFs: inverse leveraged ETFs, that is.
Inverse leveraged ETFs track an underlying index, just like their non-inverse brethren. But where a leveraged fund will seek to provide 2x or 3x the daily returns of an index, an inverse leveraged fund is built to produce two or three times the inverse of the underlying index’s daily returns.
This means that if the Dow Jones U.S. Financials Index rallies by 2%, the ProShares UltraShort Financials ETF (NYSE:SKF), which is based on that index, will pullback by 4% – twice the inverse of the index’s performance that day. And if the Russell 1000 Energy Index drops by 3% on any given day, the Direxion Energy Bear 3x Shares (NYSE: ERY), which uses the Russell 1000 Energy Index as its basis, will rally by 9%.
As of Wednesday’s finish, inverse leveraged ETFs were sporting some of the biggest edges in our database of exchange-traded funds. The SKF, for example, is on pace to open Thursday morning with a positive edge of more than 3%. Shares of ERY have earned an eye-popping positive edge of more than 11%. That’s what a 490-point day in the Dow will do for you.
In addition to these markets, traders and active investors looking around the world for edges need travel no farther than the ProShares UltraShort MSCI Emerging Markets ETF (NYSE:EEV). Shares of EEV dropped by more than 15% on Wednesday, finishing at their lowest levels in weeks. The fund, which is leveraged two-to-one to the inverse of the MSCI Emerging Markets Index, is set to open on Thursday with a positive edge of 6%.
For their parts, the ProShares UltraShort Financials ETF closed lower by well over 11%, while the Direxion Energy Bear 3x Shares finished off by more than 15%.
The ETFs in today’s report were drawn from the data and research available through The Machine. To find out more, click here.