Stock ETFs Fall, Inverse ETFs Climb as Rates Rise

Stocks and index ETFs continued their tumble on Friday due to rising bond yields, as inverse ETFs continue to climb.

With key stocks like Apple, Amazon, and Netflix dropping more than 1% apiece, the S&P 500 lost another 0.7% after attempting to stage a rally at the start of the session. The Nasdaq Composite dropped another 2.1% in the volatile session, bringing its total losses for the year to 3%. The Dow Jones Industrial Average also slipped another 0.4% after adding over 300 points earlier in the session.

Major stock ETFs are falling on Friday as well. The SPDR Dow Jones Industrial Average ETF (DIA), SPDR S&P 500 ETF Trust (SPY), and Invesco QQQ Trust (QQQ) are all lower just after noon EST.

Much of the drop this month has been attributed to rising bond yields, which make borrowing rates higher for companies in the technology and housing sectors, among others. Higher rates limit the present value of future cash flows, making long-duration assets less attractive.

The Nasdaq Composite has been the hardest hit of the three major benchmarks, plummeting almost 6% this week, and headed for its worst weekly decline since March 2020, when the effect of the pandemic first took hold. The Nasdaq also reached correction territory, a 10% drop from a recent high, on an intra-day basis.

“Right now, even after a 6% decline [on the Nasdaq], we’ve still got a ton of denial,” CNBC’s Jim Cramer said on “Mad Money.” “People don’t want to believe the sell-off is real. The market’s been so good for so long, and many newer investors have never seen this kind of pummeling, so the downdraft does seem pretty surreal.”

Inverse ETFs Welcome the Drop

While the fall has been brutal for stockholders, inverse ETF traders have been celebrating their gains, with funds like the ProShares UltraPro Short Dow 30 (SDOW) and the Direxion Daily S&P 500 Bear 1X (SPDN) outperforming in this type of environment.

Though there is optimism over a return to economic normalcy, the U.S. 10-year Treasury yield rallied above 1.6% again to hit a 2021 high after data revealed a spike in jobs growth, catalyzing fears that growth-oriented tech companies could suffer from higher borrowing costs.

While the rising yields are challenging for the Federal Reserve, some analysts see it as a buying opportunity for stock and index ETF investors.

“Equity investors, in our conversations, are really grappling with two things they may not have had to deal with for the last 10 years,” said Tom Lee, Fundstrat’s co-founder head of research. “One is the potential for inflation to actually have to be priced into equities. I think there’s a lot of confusion.”

“Then it’s a bond market that seems to be testing the Fed, which kind of scares people,” added Lee, who believes the sell-off this week represents a buying opportunity.

For more market trends, visit  ETF Trends.