The Market's Volatility Leads To An Interesting Time For Inverse ETFs

You’ve seen the headlines by now—these past few weeks have been the worst for the market since the depths of the financial crisis 10 years ago. Every major index is down, putting a damper on what is usually a cheerful time of year for the market.

One of the most interesting aspects of this sell-off is how broad-based it is. Look around the U.S. and there’s red across the board over the last four weeks, even in the most defensive sectors like utilities (down 4 percent) and consumer staples (down 9.5 percent).

The weakness has made this a great time for bearish ETFs. Look at the performance of the Direxion Daily Consumer Staples Bull 3X Shares NEED and Direxion Daily Consumer Staples Bear 3X Shares (LACK), for example. The bear fund meant for short-term traders has dramatically outperformed while the bull fund has faltered.

Chart: Yahoo Finance

The same can be said for the consumer discretionary space. The Direxion Daily Consumer Discretionary Bull 3X Shares WANT and Direxion Daily Consumer Discretionary Bear 3X Shares PASS are showing this same trend.

Chart: Yahoo Finance

The four funds above are new, only launching in early December. Still, their short-term focus can provide a window into how active traders are approaching the market.

“We expect to see the bear funds outperform the bull funds during periods like this, and the performance and fund flows reflect that,” said Sylvia Jablonski, managing director of Direxion ETFs. “It’s interesting that the defensive names are getting hit just as hard as the cyclical ones. We haven’t seen a lot of that in the last few years.”

Jablonski noted that one of the most popular trades she’s seen from Direxion clients of late involves the Direxion Daily S&P 500 Bull 3X Shares SPXL and Direxion Daily S&P 500 Bear 3X Shares SPXS. The two funds attempt to deliver 3x the daily and inverse returns of the S&P 500.

“We’re seeing a lot of activity in the SPXS these past few weeks,” she said. “A lot of our clients just want a way to capture downside on the entire market without worrying too much about individual sectors.”

Based on her conversations with clients, she believes this trend is likely to continue until something fundamental changes the market—like the upcoming earnings season, for example.

“This is obviously a great time to be a bear, and this trend is telling us that the market wants to be bearish right now. The bulls just need to hold on and ride it out.”