How To Profit From U.S.-Iran Conflict With Inverse ETFs

Geopolitics has taken front seat and shaken the stock market lately. This is especially true as the tensions between the United States and Iran has intensified after the latter fired a series of missiles at bases housing U.S. troops in Iraq.

The attack was in retaliation to U.S. air strike near the Baghdad International Airport last week that killed top Iranian general Qasem Soleimani. Iran’s President Hassan Rouhani vowed revenge and said the country will no longer abide by any limits on its enrichment of uranium. On the other hand, President Donald Trump threatened Tehran that Washington will hit Iran "harder than they have ever been hit before" if it carries out retaliatory attacks or expels U.S. troops from the country (read: 5 ETFs to Profit From Rise in Middle East Tension).

The situation has raised the appeal for inverse or leveraged inverse ETFs that could generate big gains in a short span. These products either create an inverse position or leveraged (200% or 300%) inverse position in the underlying index through the use of swaps, options, future contracts and other financial instruments.

Given this, investors seeking to capitalize the bearish market sentiments in a short span could consider any of the following inverse ETFs.

Direxion Daily Regional Banks Bear 3x Shares WDRW

WDRW seeks to deliver thrice (300%) the inverse return of the S&P Regional Banks Select Industry Index, charging 95 bps in fees per year. WDRW has accumulated $1.9 million in its asset base and trades in paltry volume of around 5,000 shares a day on average.

ProShares UltraPro Short S&P500 SPXU

This fund provides three times inverse exposure to the S&P 500 Index. It charges a fee of 91 bps per year and has solid trading volume, exchanging about 5.7 million shares per day on average. SPXU has amassed $540.9 million in its asset base (read: Guide to the 10 Most-Popular Leveraged Inverse ETFs).

ProShares UltraShort Basic Materials (ASX:SMN)

This product seeks two times (200%) the inverse of the daily performance of the Dow Jones U.S. Basic Materials Index, charging investors 95 bps in annual fees. It has been able to manage $5.4 million in its asset base and sees meager volume of around 8,000 shares a day on average (read: Iraq Attack: Sector ETF Winners and Losers).

ProShares UltraPro Short QQQ SQQQ

This ETF provides three times inverse exposure to the daily performance of the Nasdaq-100 Index, charging 95 bps in annual fees. It has AUM of $1 billion and trades in average daily volume of about 14.4 million shares. It charges 95 bps per year.

ProShares UltraPro Short Dow30 ETF SDOW

This fund provides three times inverse exposure to the Dow Jones Industrial Average. It charges a fee of 95 bps per year and its trading volume is solid, exchanging about 1.2 million shares per day on average. It has amassed $247.8 million in its asset base (read: Inverse ETFs to Bet on Market Sell-off).

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 seesaw 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 concerned over renewed tariff threats and the resultant downward pressure on the stock market for the near term, either of the above products could make an interesting choice. Clearly, a near-term short could be intriguing for those with high-risk tolerance, and a belief that the “trend is the friend” in this corner of the investing world.

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ProShares UltraPro Short Dow30 (SDOW): ETF Research Reports

ProShares UltraPro Short QQQ (SQQQ): ETF Research Reports

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

Direxion Daily Regional Banks Bear 3X Shares (WDRW): ETF Research Reports

ProShares UltraShort Basic Materials (SMN): ETF Research Reports

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Zacks Investment Research