Following Morgan Stanley? Tap Inverse S&P 500 ETFs

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The S&P 500 is about to decline sharply, Morgan Stanley’s Michael J. Wilson cautioned (as quoted on Bloomberg), as defensive investments are becoming pricey. Chances of aggressive policy tightening by the Federal Reserve have led to the fear of recession and the underperformance of the S&P 500.

“With defensive stocks now expensive and offering little absolute upside, the S&P 500 appears ready to join the ongoing bear market,” said Morgan Stanley strategists in a note on Monday. “The market has been so picked over at this point, it’s not clear where the next rotation lies. In our experience, when that happens, it usually means the overall index is about to fall sharply with almost all stocks falling in unison.”

Moreover, the stock market selloff still has another 20% to go, said Michael Howell, the chief executive of CrossBorder Capital, a boutique he formed in 1996, as quoted on MarketWatch. Reserves at the Fed dropped by $460 billion last week, which according to Citigroup, was the biggest weekly decline ever, the MarketWatch article pointed out. The liquidity concern is worrying, and hence the S&P 500 may fall ahead despite a strong earnings growth prospect.

The projected rise in S&P 500 earnings per share this year stands at 8.9% compared with 8.1% at the end of March, according to S&P Global Market Intelligence, as quoted on the MarketWatch article. But due to sky-high inflation, the Fed is looking for aggressive monetary policy tightening. So are other developed central banks. This would result in a slump in the market.

Per the above-mentioned article, “Howell said a normal tightening cycle would lead the S&P 500 down by around 15%, if a recession is thrown on top that’s a 30% drop, and if there’s a banking crisis on top of that, there’s a 50% slide,” though chances of the third threat are very less. Since there’s already about 10% of the decline in the S&P 500 from the peak, another 20% drop is likely to come, per Howell.

Against this backdrop, investors may tap inverse S&P 500 ETFs at the current level. Below we highlight a few of them.

ETFs in Focus

ProShares Short S&P500 SH

The ProShares Short S&P500 seeks daily investment results, before fees and expenses, that correspond to the inverse or opposite of the daily performance of the S&P500. The fund charges 88 bps in fees.

Direxion Daily S&P 500 Bear 1x Shares SPDN

The Direxion Daily S&P 500 Bear 1X Shares seeks daily investment results, before fees and expenses, of 100% of the inverse (or opposite) of the performance of the S&P 500 Index. The fund charges 49 bps in fees.

ProShares UltraShort S&P500 SDS

The ProShares UltraShort S&P500 seeks daily investment results, before fees and expenses, that correspond to twice (200%) the inverse (opposite) of the daily performance of the S&P 500. The fund charges 90 bps in fees.

ProShares UltraPro Short S&P500 SPXU

The ProShares UltraPro Short S&P500 seeks daily investment results, before fees and expenses, that correspond to triple (300%) the inverse (opposite) of the daily performance of the S&P 500. The fund charges 90 bps in fees.

Direxion Daily S&P 500 Bear 3X Shares SPXS

The ProShares UltraPro Short S&P500 seeks daily investment results, before fees and expenses, that correspond to triple (300%) the inverse (opposite) of the daily performance of the S&P 500. The fund charges 90 bps in fees.

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ProShares UltraShort S&P500 (SDS): ETF Research Reports
 
ProShares UltraPro Short S&P500 (SPXU): ETF Research Reports
 
ProShares Short S&P500 (SH): ETF Research Reports
 
Direxion Daily S&P 500 Bear 1X Shares (SPDN): ETF Research Reports
 
Direxion Daily S&P 500 Bear 3X Shares (SPXS): ETF Research Reports
 
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