Bearish ETFs Bets Are Taking Hold | ETF Trends

Exchange traded fund traders are signaling increased bearish bets as more try to hedge recession risks.

Trades involving inverse or bearish ETF strategies that capitalize on the decline in markets now eclipse activity in bullish leveraged products by the widest margin since the 2008 financial crisis, Bloomberg reported. Leveraged-long ETF strategies have always been more popular than their bearish counterparts, since traders can use the leveraged products to increase market gains by two- or even three-times daily moves.

The heightened bearish sentiment comes after the Federal Reserve indicated an increasingly aggressive monetary policy stance with its latest 75 basis point interest rate hike to combat inflation, which is running at a four-decade high. Consequently, the urge to buy the dip is beginning to fade.

“It makes sense to see inverse ETFs becoming more popular and receiving inflows,” Peter Chatwell, head of global macro strategies trading at Mizuho International Plc., told Bloomberg. “For real money investors, downside protection of a portfolio is difficult to come by, particularly in a rising yield environment where government bonds don’t work well as a hedge.”

Government bonds and other conservative fixed income assets have traditionally outperformed in a slowing economic environment, acting as diversifiers to provide non-correlated returns while equities pull back. However, the rising interest rate outlook and elevated inflation levels have put pressure on traditionally safer bonds.

In response, traders have turned to inverse products to hedge current market risks. For example, the ProShares UltraPro Short QQQ ETF (SQQQ), which reflects the triple inverse or -300% of the Nasdaq-100, saw assets under management rise to an all-time high of $4.1 billion last week. Meanwhile, the bullish leveraged ProShares UltraPro QQQ (TQQQ) saw assets dip to its lowest in over a year, according to Bloomberg data.

“It shows the lack of conviction in the market — investors are selling the rallies now versus buying the dips,” Athanasios Psarofagis, an ETF analyst with Bloomberg Intelligence, said. “You can see the sea change in sentiment, even during March ’20, investors were buying the dip.”

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