An Inverse ETF For Nervous Traders

Leveraged exchange traded funds (ETFs) remain seductive to many traders. After all, plenty of traders like the idea of seeing an ETF deliver double or triple the daily returns of a particular index.

While that sounds like of lot fun, leveraged ETFs are not for every trader or investor. These vehicles are best used over short trading periods because the longer a leveraged fund is held, the greater the chances are that it will deviate from its stated objective.

What Happened

The same risks apply to leveraged inverse, or leveraged bearish funds, but traders looking to establish short positions or hedge long positions can effectively do so without deploying leveraged. Direxion, one of the largest issuers of inverse and leveraged ETFs, offers plenty of ETFs that are bearish without leveraged.

Those funds include the Direxion Daily S&P 500 Bear 1X Shares SPDN. As its name implies, SPDN looks to deliver the daily inverse performance of the S&P 500. So if the S&P 500 falls by 1 percent on a particular day, SPDN should rise by that amount.

Why It's Important

Entering Monday, the S&P 500 is up 8.10 percent year-to-date and coming off one of its best January showings on record. Those factors could increase the near-term allure of SPDN.

“One of the most striking things you might first notice in the chart is how close to parity the index and its counterpoint have been since October,” said Direxion in a recent note. “The two charts (SPDN and S&P 500) rebound off one another’s 2018 entry three or four times between mid-October and the end of November before finally making a definitive cross in December.”

Due to SPDN not being a leveraged ETF, the effects of compounding are less magnified than they would be on a leveraged counterpart, such as the Direxion Daily S&P 500 Bear 3X Shares SPXS.

What's Next

SPDN's ability to mirror the daily inverse of performance of the S&P 500 could be particularly noteworthy over the near-term.

Both the bear fund and the S&P 500 “are again approaching a cross at their 2018 starting prices,” said Direxion. “Bear in mind that CBOE’s volatility index is still about where it was through October and November, 2018, which coincided with some of the market’s biggest down days of the year. As in previous months with heightened volatility, it might not be entirely odd to see similar dramatic volatility in the months to come, as buyers and sellers fight it out as to whether to dig further out of the 2018 hole.”

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