The back-to-back selling in U.S. equities is fueling a rally in inverse exchange traded funds that capitalize off the stock market’s pain.
The Dow Jones Industrial Average plunged another 350 points Thursday while the S&P 500 was down 2.1% and the Nasdaq was off 2.7%.
On Thursday, the SPDR S&P 500 ETF (NYSEArca: SPY) fell 2.4%, PowerShares QQQ (NasdaqGM: QQQ) declined 3.1% and SPDR Dow Jones Industrial Average ETF (NYSEArca: DIA) dropped 2.3%. All three ETFs were below their 200-day simple moving averages.
According to FactSet data that goes back to 1897, the Dow is on its worst four-day start to a year on record, reports Matt Egan for CNN Money.
“This has all the earmarks of the beginning of a significant stock market correction. Many would argue it’s the beginning of a bear market,” Tim Anderson, managing director of MND Partners, wrote in a client note.
Meanwhile, investors who were seeking a hedge against further weakness in the Dow Jones Industrial Average utilized inverse ETFs to bolster their long equities positions. For instance, the ProShares Short Dow 30 ETF (NYSEArca: DOG) tries to reflect the -100% daily performance of the Dow Jones Industrial Average. For the more aggressive traders, the ProShares UltraShort Dow 30 ETF (NYSEArca: DXD) takes the -200% of the Dow Jones and the ProShares UltraPro Short Dow 30 (NYSEArca: SDOW) reflects the -300% of the Dow. [Do You Know How Your Leveraged ETFs Work?]
For those who were wary of a potential pullback in the S&P 500 index, there are a number of bearish or inverse ETF options with varying levels of leveraged exposure to capitalize off a weakening S&P 500. The ProShares Short S&P500 (NYSEArca: SH) takes a simple inverse or -100% daily performance of the S&P 500 index. Alternatively, for the more aggressive trader, leveraged options include the ProShares UltraShort S&P500 ETF (NYSEArca: SDS), which tries to reflect the -2x or -200% daily performance of the S&P 500, the Direxion Daily S&P 500 Bear 3x Shares (NYSEArca: SPXS), which takes the -3x or -300% daily performance of the S&P 500, and ProShares UltraPro Short S&P 500 ETF (NYSEArca: SPXU), which also takes the -300% daily performance of the S&P 500.
Lastly, investors also hedged against a dipping Nasdaq through bearish options as well. For instance, the ProShares Short QQQ ETF (NYSEArca: PSQ) takes the inverse or -100% daily performance of the Nasdaq-100 Index. For the aggressive trader, the ProShares UltraShort QQQ ETF (NYSEArca: QID) tracks the double inverse or -200% performance of the Nasdaq-100, and the ProShares UltraPro Short QQQ ETF (NasdaqGM: SQQQ) reflects the triple inverse or -300% of the Nasdaq-100.
Max Chen contributed to this article.