How To Short The S&P 500 With ETFs

The fast spreading coronavirus has taken away the stock market’s shine, pushing the major U.S. indices into a correction territory (a fall of 10% or more from the recent peak). The S&P 500 saw the fastest correction since the Great Depression with six consecutive days of decline after it hit new record highs last week. The index is down 12% from its record high hit on Feb 19. In fact, the index marked the worst daily percentage decline since Aug 18, 2011 (read: Virus Erases $1.7T From Wall Street: Play Multi-Asset ETFs).

The number of virus cases across the globe has been rising rapidly. The contagion has resulted in more than 2,800 deaths and has infected about 83,000 worldwide including more than 650 in Italy, 60 in the United States, 25 in Spain, and 16 in the United Kingdom. The World Health Organization warned that the coronavirus outbreak had “pandemic potential,” with cases continuing to climb across the world.

With escalation in virus scare, the global economy is on course for its weakest year since the 2008 financial crisis as efforts to contain epidemic has hit manufacturing activity in China and disrupted international trade and travel, according to Bank of America (NYSE:BAC). Per International Monetary Fund, the outbreak could reduce global economic growth by 0.1% this year. Goldman now projects the U.S. economy to grow just 1.2% in the first quarter, down from 2.1% in the fourth quarter and 2.3% in full-year 2019.

Given the bearish trends, investors could easily tap this opportune moment by going short on the index. There are a number of inverse or leveraged inverse products in the market that offer inverse (opposite) exposure to the index. Below, we highlight those and some of the key differences between each:

ProShares Short S&P500 ETF SH

This fund provides unleveraged inverse exposure to the daily performance of the S&P 500 index. It is the most popular and liquid ETF in the inverse equity space with AUM of $2.1 billion and average daily volume of 5.3 million shares. The fund charges 89 basis points (bps) in annual fees and has added 12.8% in a week (read: ETF Strategies to Mark as Covid-19 Flares up Recession Scares).

Direxion Daily S&P 500 Bear 1X Shares SPDN

This ETF also offers unleveraged inverse exposure to the daily performance of the S&P 500 index. It has accumulated $18.9 million in its asset base while trades in average daily volume of 34,000 shares. The fund is cheap relative to other inverse products as it charges just 45 bps in annual fees. It has gained 12.9% in the same time frame.

ProShares UltraShort S&P500 ETF SDS

This fund seeks two times (2x) leveraged inverse exposure to the index, charging 89 bps in fees. It is also relatively popular and liquid having amassed nearly $1.3 billion in AUM and more than 7 million shares in average daily volume. It has climbed 26.9% in a week.

ProShares UltraPro Short S&P500 SPXU

Investors having a more bearish view and higher risk appetite could find SPXU interesting as the fund provides three times (3x) inverse exposure to the index. The ETF charges a fee of 91 bps per year and trading volume is solid, exchanging around 7.2 million shares per day on average. It has amassed $660.6 million in its asset base and is up 42% in the same time frame (read: 10 Inverse ETFs That Gained More Than 30% Over the Past Week).

Direxion Daily S&P 500 Bear 3x Shares SPXS

Like SPXU, this product also provides three times inverse exposure to the index but comes with 4 bps higher fees. It trades in solid volume of about 9 million shares and has AUM of $546.7 million. SPXS surged 42% in a week.

Bottom Line

While the strategy is highly beneficial for short-term traders, it could lead to huge losses compared with traditional funds in fluctuating or seesawing markets. Further, their performances could vary significantly from the actual performance of their underlying index over a longer period when compared to the shorter period (such as, weeks or months) due to their compounding effect (see: all the Inverse Equity ETFs here).

Still, for ETF investors who are bearish on equities for the near term, either of the above products could make an interesting choice. Clearly, these could be intriguing 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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ProShares UltraShort S&P500 (SDS): ETF Research Reports

Direxion Daily S&P 500 Bear 3X Shares (SPXS): ETF Research Reports

ProShares UltraPro Short S&P500 (SPXU): ETF Research Reports

ProShares Short S&P500 (SH): ETF Research Reports

Direxion Daily S&P 500 Bear 1X Shares (SPDN): ETF Research Reports

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Zacks Investment Research