Bear Market Watch: 2 ETFs to Hedge Against Volatility
Data show the short-term benefits of betting against the markets, but fund flows are mixed.
Consecutive Mondays opening the trading week with wild volatility has drawn fresh attention to ways to hedge and even bet against the current, aging bull market.
With that in mind, we are tapping into etf.com’s data to feature two ETFs designed to feed a hungry bear.
The ProShares UltraShort S&P500 ETF (SDS) offers two times the inverse exposure to a market-cap weighted index of companies that combine to represent a proxy for the S&P 500.
As designed, SDS moves in the opposite direction of the SPDR S&P 500 ETF Trust (SPY). Over the past 12 months, for example, SPY has generated a 22.6% return while SDS has declined by 34%. The S&P 500 has notched gains of more than 25% in each of the past two years.
But, as a reminder, ETFs that apply leverage to enhance performance or offer short-selling exposure typically reset daily, which means the trend can be brutal if it is going against you, and they are held for more than a day or two.
Bearish Bets Expose ETF Risks, Rewards
The trick to this kind of short-term trading activity is timing, which many financial advisors might consider foolish. But that doesn’t make it any less fun to measure on a back-tested basis.
Take this past Monday, for example, when President Trump’s global tariff threats sent equity markets into an early morning tailspin before correcting course later in the day.
From an aftermarket trading low on Friday, Jan. 31 through 10 a.m. ET on Monday, Feb. 3, traders pushed SDS up 6.5% during the same period that saw SPY lose 1.5%.
A similar story can be told involving the ProShares UltraShort QQQ ETF (SQQQ), which offers three times the inverse exposure of an indexed proxy for the Invesco QQQ Trust (QQQ).
Over the trailing 12 months, QQQ is up almost 24%, while SQQQ has fallen nearly 53%.
But the magic of shorting exposes a nearly 11% gain between mid-morning on Jan. 31 and mid-morning on Feb. 3 for SQQQ, while the long-only QQQ fell by nearly 4%.
In terms of fund flows, the $2.2 billion SQQQ was the winner this past week, taking in nearly $130 million, while the much larger $319 billion QQQ experienced $3.7 billion worth of outflows.
The etf.com data shows both SDS and SPY took asset flow hits over the past week, with the $399 million SDS losing $5.5 million and the $624 billion SPY watching $5.5 billion head out the door, which ranks SPY and QQQ as the top two ETFs this week for outflows.
