The tech sector had the worst start to the year since 2002 as the giants were hit hard by soaring yields and monetary tightening by the Federal Reserve. In fact, the big tech stocks are facing their biggest rout in more than a decade. The S&P 500 information technology sector has fallen 20% so far this year.
That prompted investors to shell out a record $7.6 billion this year from technology-focused mutual funds and ETFs through April, according to Morningstar Direct data dating back to 1993. Ultra-popular Select Sector SPDR Technology ETF (XLK – Free Report) withdrew more than $179 million in capital (read: 6 reasons tech ETFs may rebound soon).
As a result, inverse or inverse leveraged ETFs have risen as they generate outsized returns on short-term bearish sentiments. Dow Jones Internet Bear 3X Daily Stocks (CANVAS – free report), FANG & Innovation MicroSectors -3x Reverse Leveraged ETN (BERZ – free report), Direxion Daily Cloud Computing Bear 2X Shares (CLDS – free report), Direxion Daily Technology Bear 3x Stocks (CETC – free report) and ProShares UltraShort Technology (REW – Free Report) have outperformed and could continue their strong performance if sentiments remain the same.
The central bank took the most aggressive policy action in decades to combat soaring inflation by raising rates by 50 basis points last month and pushing the benchmark index above 0, 75%. The rise marked the largest increase in interest rates since 2000, sending yields soaring. 10-year Treasury yields jumped to the highest level since 2018 to exceed 3%. The technology sector relies on easy borrowing for superior growth and its value is highly dependent on future earnings. A rise in long-term yields lowers the present value of future corporate earnings, sparking fears of overvaluation (read: Why high-dividend ETFs are beating the market).
In addition, many of the trends that have developed over the past couple of years – including bullish options trading, special purpose acquisition companies and cryptocurrencies – have turned around, mitigating the risk. attractiveness of tech stocks. Many investors believe that the combination of factors has ended a decade of technological dominance in the markets.
Leveraged and Reverse Leveraged ETFs
Leveraged and reverse leveraged ETFs create a leveraged long/short, reverse long/short or reverse leveraged long/short position in the underlying index through swaps, options, futures and other financial instruments. Due to their cumulative effect, investors can enjoy higher returns over a 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 ups and downs markets. Also, their performance may differ significantly from the actual performance of their underlying index over a longer period versus a shorter period (such as weeks or months).
Investors should note that these products are only suitable for short-term traders as they are rebalanced daily. Additionally, liquidity can be a big issue as it can make products more expensive than they appear (see: all Inverse Equity ETFs here).
Yet ETF investors looking to exploit sharp moves can go long or short in the short term.
Daily Dow Jones Internet Bear 3X Shares (CANVAS – Free report) – Up to 127.7%
Daily Dow Jones Internet Bear 3X Shares offers a three-fold inverse play on the Internet corner of the broad tech sector following the Dow Jones Internet Composite Index.
Daily Dow Jones Internet Bear 3X Shares has attracted $40.7 million to its asset base and charges 95 basis points in annual fees. The ETF sees an average daily volume of around 335,000 shares.
FANG & Innovation MicroSectors -3x Reverse Leveraged ETN (BERZ – Free Report) – Up to 68.2%
MicroSectors FANG & Innovation -3x Inverse Leveraged ETN is linked to the inverse performance at three times the leverage of the Solactive FANG Innovation Index. The index tracks the stock prices of 15 large-cap and highly liquid US technology stocks.
With an AUM of $9 million, MicroSectors FANG & Innovation -3x Inverse Leveraged ETN has an expense ratio of 0.95% and trades in an average daily volume of 80,000 shares.
Direxion Daily Cloud Computing Bear 2X Shares (CLDS – Free report) – Up to 44.2%
Direxion Daily Cloud Computing Bear 2X Shares targets the cloud computing segment of the broader technology sector, providing twice inverse exposure to the performance of the Indxx USA Cloud Computing Index.
With an AUM of $19.5 million, Direxion Daily Cloud Computing Bear 2X Shares has an expense ratio of 0.95% and trades in an average daily volume of 12,000 shares.
Direxion Daily Technology Bear 3x Stocks (CETC – Free Report) – Up to 42%
Direxion Daily Technology Bear 3x Shares provides three times inverse exposure to the daily performance of the Technology Select Sector Index.
Direxion Daily Technology Bear 3x Shares has amassed around $123.6 million in its asset base while charging investors 95 basis points in fees per year. Volume is strong as it trades around 3 million shares a day on average (read: Inverted ETFs take off as market turns sour).
ProShares UltraShort Technology (REW – Free report) – Up to 41.7%
ProShares UltraShort Technology offers twice the inverse of the daily performance of the Dow Jones US Technology Index, which measures the performance of companies including those involved in computers and office equipment, software, communication, semiconductors, diversified technology services and Internet services. .
ProShares UltraShort technology has accumulated $12.4 million in its asset base and charges 95 basis points in annual fees. It trades an average daily volume of almost 64,000 shares.
Although the strategy is very beneficial for short-term traders, it could lead to huge losses compared to traditional funds in fluctuating markets. Due to their cumulative effect, investors can enjoy higher returns in a short period of time, provided the trend remains a friend.
In addition, their performance may differ significantly from the actual performance of the underlying index over a longer period compared to a shorter period (such as weeks or months).