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The steep drops for the stock and bond markets in recent weeks have been a windfall for the funds that make leveraged bets against some of Wall Street’s benchmarks. The list of top-performing exchange-traded funds since Sept. 19 — the day before the Federal Reserve released new projections that showed fewer rate cuts in 2024 — is dominated by leveraged and leveraged inverse products. These funds are designed to deliver the opposite daily move of a group of stocks, bonds or commodities, and in some cases, a multiple of that opposite move. Some of the best-performing funds in that period through Thursday’s close include the Direxion Daily 20+ Year Treasury Bear 3x Shares (TMV) , up nearly 25%, and the ProShares UltraShort Bloomberg Crude Oil ETF (SCO) , which has jumped 19%. Trading volume has also been elevated. Between Sept. 19 and Oct. 6, the number of shares traded daily for ProShares’ short fund for the Nasdaq 100 ( SQQQ ) was 11% higher than the average of the previous three months, according to FactSet. The jump has been even bigger for the firm’s UltraShort 20+ Year Treasury product ( TBT ) at 66% above the previous average. “With what’s happening with interest rates, we are seeing more people play bond ETFs now, with the short tilt to it,” said Mohit Bajaj, director of ETF trading solutions at WallachBeth. The performance and increased interest shows that the inverse funds are doing their jobs, but there are important caveats for investors to know. For one, the products are expensive compared to long-only ETFs. For example, Direxion’s TMV has a net expense ratio of 1.01%, while the long-only iShares 20+ Year Treasury Bond ETF (TLT) costs 0.15%. The other major detail is that the funds are designed as short-term trading vehicles, and many even have “daily” in their name to signal this. “Most leveraged and inverse ETFs ‘reset’ daily, meaning that they are designed to achieve their stated objectives on a daily basis,” the U.S. Securities and Exchange Commission said Aug. 29 in an investor bulletin . “Their performance over longer periods of time — over weeks or months or years — can differ significantly from the stated multiple of the performance (or inverse of the performance) of their underlying index or benchmark during the same period of time.” Even more sophisticated traders will not sit in the funds for long periods of time, according to Bajaj. “A lot of retail traders, they might do it from a one-day perspective. I think some larger institutions or mid-tier hedge funds might hold it for a week, two weeks. It really depends on the volatility in the market,” Bajaj said. The universe of inverse and leveraged inverse funds has grown widely, including sector-specific funds and even some single-stock products. Investors should be aware that those may be smaller and less liquid than the more established funds that cover a broader group of assets. “They’re going to be much more volatile than something that tracks the S & P 500, for example,” said Aniket Ullal, head of ETF data and analytics at CFRA Research. Of course, the leveraged inverse funds can suffer massive losses if the market rebounds. Ullal also pointed out that some inverse products are technically exchange traded notes, not ETFs, which can introduce some credit risk in a trade.
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