Though 2013 was a banner year for the U.S. equity markets, 2014 has seen a weak start signaling a reversal of the bullish trend. Most of the stocks have tumbled due to weak job numbers and stubbornly low inflation in December that have eroded investor confidence.
The Q4 2013 earnings season is in full-gear, with earnings failing to impress the equity markets so far. The numbers look weak and the guidance is uninspiring with sub-par outlook for the coming quarters for most companies.
The sentiment in equity markets is becoming more bearish of late thanks to emerging market weakness and signs of slowdown in the world’s second largest economy that have raised concerns over global economic growth. Disappointing manufacturing data and the debt default worries are weighing on Chinese economic growth.
Last week, the S&P 500 witnessed the worst decline since June 2012 while the Dow saw the sharpest fall since May 2012, suggesting a bigger drop in the days ahead.
Investors are losing faith in some of the big developing nations, resulting in losses in the emerging market currencies. This is especially true as the market saw an additional $10 billion cut in the U.S. monetary stimulus plan at the two-day meeting this week. This boost to tapering looks to in a surge in dollar against the basket of currencies and the prospect of rising interest rates.
Further, growing political problems and financial instability in many countries including China, Argentina, Turkey, Ukraine, South Africa and Brazil are also adding to the woes (read: 3 Emerging Market ETFs to Watch for Political Issues in 2014).
The contagion in emerging nations has been spilling over to the global market and this trend is likely to continue at least for the near term. Further, the largest and ultra-popular SPDR S&P 500 ETF (SPY - ETF report), with an asset base of around $166.7 billion and average daily volume of around 109 million shares, has seen more than $6.1 billion in outflows so far this year.
While this might not seem like a huge number, investors should note that this is nearly three times greater than the second biggest outflow (EEM) in the same time frame. Given this outflow and pessimism over global economic growth, the appeal of some equity ETFs seems to be dulling.
In such turbulent times, investors are shifting their exposure to safe havens like Treasuries and gold. While these are good bets, investors could also make a short-term play on the equity markets with the inverse ETFs.
For these investors, we have highlighted the three most popular inverse ETFs that could deliver higher returns if the current trend continues going forward:
ProShares Short S&P 500 ETF (SH)
This fund seeks to deliver 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 nearly $1.5 billion and average daily volume of around 3.3 million shares. The fund charges 90 bps in fees and expenses. The product added over 3% in the year-to-date time frame.
ProShares Short Russell 2000 ETF (RWM)
This ETF targets the small cap segment of the broad U.S. equity market from a bearish perspective. This is done by tracking the inverse performance of the Russell 2000 Index.
The fund has amassed $457.4 million and trades in heavy volume of 1.3 million shares per day. Expense ratio came in at 0.95%. RWM is up 1.42% so far this year.
ProShares Short Dow 30 ETF (DOG)
This product seeks to deliver inverse exposure to the daily performance of the Dow Jones Industrial Average, which includes 30 blue chip companies. The fund has managed $273.9 million in its asset base while it charges 95 bps in fees and expenses.
Volume is moderate as it exchanges less than 395,000 shares per day on average. DOG gained more than 4% in the year-to-date time frame.
Bottom Line
As a caveat, investors should note that these products are suitable only for short-term traders as these are rebalanced on a daily basis.
Still, for ETF investors who are bearish on the equity market for the near term, either of the above products could make for an interesting choice. Clearly, a near-term short could be intriguing for those with high-risk tolerance, and a belief that the “trend is your friend” in this corner of the investing world.