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Leveraged/Inverse ETFs That Soared on North Korea Tensions

Wall Street witnessed the worst weekly performance in months given escalating tensions between the U.S. and North Korea. Notably, the S&P 500 and the Dow Jones Industrial posted their second-worst week of the year, shedding 1.4% and 1.1%, respectively, while the Nasdaq logged its third-worst week plunging 1.5%. Meanwhile, the small cap index - Russell 2000 – also lost 2.7% last week, representing its biggest one-week decline since February 2016.

The war of words between Donald Trump and North Korean officials has deepened last week that shook complacency in the broad stock market, prompting risk-off trade. Trump has warned that North Korea would face "fire and fury like the world has never seen" if it continues to threaten the U.S. and the North Korea retaliated by threatening to launch a missile strike on the U.S. Pacific territory of Guam, which is home to a large U.S. military base.

Further, Trump doubled down on his aggressive stance on North Korea by saying that his threat to unleash “fire and fury” on the country was not “tough enough and tweeted that "Military solutions are now fully in place, locked and loaded, should North Korea act unwisely” (read: ETFs to Profit from US-North Korea Tensions).

Coupled with rising North Korea tensions, disappointing earnings results from some of the large retailers like Macy’s M and Kohl’s KSS, social media network Snap SNAP and the meal-kit maker Blue Apron Holdings APRN weighed on the market.

Given higher volatility, inverse or leveraged inverse ETFs gained immense popularity last week as investors embraced these products for big gains in a short span though these involve a great deal of risk when compared to traditional products. These products create either a leveraged long/short position, an inverse long/short position or a leveraged inverse long/short position in the underlying index by employing various investment strategies such as swaps, options, future contracts and other financial instruments. Due to their compounding effect, investors can enjoy higher returns in a very short period of time provided the trend remains a friend.

Below, we have highlighted six such ETFs that crushed the market last week and should continue to do so at least for the near term as long as North Korea tensions perturb the stock market.

ProShares Ultra VIX Short-Term Futures ETF UVXY

This product provides two times (2x) leveraged exposure to the S&P 500 VIX Short-Term Futures Index, which measures the returns of a portfolio of monthly VIX futures contracts with a weighted average of one month to expiration. It has amassed $343.9 million in its asset base and trades in heavy volume of 10.3 million shares a day on average. The ETF charges 95 bps in fees per year and gained 45% last week (read: Volatility Spikes on Geopolitics: 4 ETF Tactics to Shield).

Direxion Daily Regional Banks Bear 3x Shares WDRW

This fund seeks to deliver thrice (3x) the inverse return of the S&P Regional Banks Select Industry Index, charging 95 bps in fees per year. WDRW has accumulated $4.8 million in its asset base and trades in a paltry volume of around 2,000 shares a day on average. The fund was up 14.8% last week.

Direxion Daily Junior Gold Miners Index Bull 3x Shares JNUG

This product provides 3x exposure to the daily performance of the MVIS Global Junior Gold Miners Index. It charges 95 bps in annual fees and has accumulated nearly $775.8 million in its asset base. Volume is heavy, exchanging more than 16 million in shares per day on average. JNUG gained 11.1% in the last week (read: Will Gold ETFs Shine in August?).  

Direxion Daily S&P Biotech Bear 3x Shares LABD

This product seeks to deliver 3x the inverse daily performance of the S&P Biotechnology Select Industry Index. The fund has amassed $96.1 million in its asset base and trades in average daily volume of around 4.9 million shares. It charges investors 95 bps in annual fees and expenses. The ETF delivered returns of 8.8% last week.

Direxion Daily Energy Bear 3x Shares ETF ERY

This product provides 3x inverse exposure to the Energy Select Sector Index. It is extremely popular and trades in heavy volume nearly 1.2 million shares. The ETF charges annual fee of 95 bps and has AUM of $46.9 million. It has gained 8.3% last week.

Direxion Daily Small Cap Bear 3x Shares TZA

This product provides 3x inverse play to the Russell 2000 Index, charging 95 bps in fees and expenses. It has been able to manage $733.8 million in its asset base with heavy average daily volume of 9.8 million shares. TZA was down 8.3% last 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 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 Leveraged 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, this could be intriguing for those with high-risk tolerance should the trend continue in this specific corner of the investing world.

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Snap Inc. (SNAP): Free Stock Analysis Report
PRO-ULT VIX STF (UVXY): ETF Research Reports
DIR-EGY BEAR 3X (ERY): ETF Research Reports
DIRX-SC BEAR 3X (TZA): ETF Research Reports
DIRX-D SP BBEAR (LABD): ETF Research Reports
DIR-DJGMI BL 3X (JNUG): ETF Research Reports
Macy's Inc (M): Free Stock Analysis Report
Kohl's Corporation (KSS): Free Stock Analysis Report
DIR-D RG BK BR3 (WDRW): ETF Research Reports
BLUE APRON HLDG (APRN): Free Stock Analysis Report
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