3 Inverse ETF short selling small-cap stocks

Small-cap stocks offer attractive return potential, but they also tend to be more volatile than stocks with larger market capitalizations. The market value of companies that are considered small-cap stocks is usually between US$300 million and US$2 billion. Unlike large American companies, small-cap companies usually focus on domestic economic growth. Investors who are optimistic about the future growth of small companies can use small publicly traded funds (ETFs) to invest in a diversified basket of small stocks. However, investors who are worried that the economic shock or the current severe recession in the United States may not end soon can short small-cap stocks through inverse small-cap ETFs.

Key points

  • The three reverse small-cap ETFs that short small-cap stocks are MYY, SBB and RWM.
  • These ETFs use index swaps to provide inverse exposure to their underlying benchmarks.

Due to increased concerns about the coronavirus pandemic, stock prices plummeted earlier this year, and the U.S. stock market officially entered a bear market in 2020. From February 19 to March 23 this year, the Standard & Poor’s 500 Index fell by 33.8%. However, inverse small-cap ETFs that use various financial derivatives to provide short exposure to small-cap stocks rose sharply over the same period.

Compared to non-inverted ETFs, inverted ETFs may be riskier investments because they only aim to achieve the reverse of their benchmark one-day return. You should not expect them to do this in terms of long-term returns. For example, an inverse ETF may return 1% in a day when its benchmark falls by -1%, but you should not expect it to return 10% in a year when the benchmark falls by -10%. For more details, please refer to this SEC alert.

There are 3 inverse ETFs used to short small-cap stocks, excluding leveraged ETFs. Although these ETFs rose sharply during the bear market crash earlier this year, they have fallen sharply in the past 12 months as the stock market recovered from the crash. The S&P 500’s total return in the past year was 22.4%.Based on its performance during the bear market earlier this year, the best-performing reverse small-cap ETF is ProShares Short Midcap 400 (MYY). We studied the following 3 inverse ETFs to short small-cap stocks. All figures in this story are as of September 1, 2020.

ETFs with very low assets under management (AUM) (less than US$50 million) are generally less liquid than large ETFs. This may result in higher transaction costs, thereby offsetting part of your investment income or increasing your losses.

  • Performance from February 19, 2020 to March 23, 2020: 59.3%
  • Performance over one year: -17.3%
  • Expense rate: 0.95%
  • Annual dividend yield: 0.66%
  • 3-month average daily volume: 15,382
  • Assets under management: US$24.1 million
  • Date of Establishment: June 21, 2006
  • Publisher: ProShares

MYY provides short exposure to small and mid-cap stocks tracked by the S&P Midcap 400 Index. Technically speaking, the market value of a mid-cap company is usually between US$2 billion and US$10 billion. However, there is no strict dividing line between small-cap stocks and mid-cap stocks, and many brokerages have drawn their own boundaries between these two categories. Therefore, in addition to mid-cap stocks, the ETF also provides exposure to many small-cap stocks. ETFs use various index swaps to provide -1 times exposure to the daily performance of their indexes. The return of the fund is compounding every day. If it is held for more than one day, this may cause the result to be significantly different from the target return. MYY is geared towards sophisticated investors with short-term time horizons.

  • Performance from February 19, 2020 to March 23, 2020: 57.3%
  • Performance over one year: -15.6%
  • Expense rate: 0.95%
  • Annual dividend yield: 0.59%
  • 3-month average daily volume: 18,705
  • Assets under management: US$12.5 million
  • Date of establishment: January 23, 2007
  • Publisher: ProShares

SBB provides short positions in stocks tracked by the S&P SmallCap 600 Index, which is composed of US small-cap stocks. The ETF seeks to provide a return of -1 times the daily return of its index. It uses various index swaps to provide reverse exposure to small-cap stocks. The return of the fund is compounding every day, resulting in a result that may be very different from the target return. SBB is aimed at sophisticated investors who can monitor their holdings on a daily basis.

  • Performance from February 19, 2020 to March 23, 2020: 55.4%
  • Performance over one year: -19.8%
  • Expense rate: 0.95%
  • Annual dividend yield: 1.02%
  • 3-month average daily volume: 2,418,570
  • Assets under management: US$459.7 million
  • Date of establishment: January 25, 2007
  • Publisher: ProShares

RWM provides short positions in stocks tracked by the Russell 2000 Index, which is composed of US small-cap stocks. The ETF seeks to provide a return of -1 times the daily performance of its underlying benchmark. It uses various index swaps to provide short exposure to some of the smallest stocks in the US stock market. The return of the fund is compounding every day, which may result in a result that may be very different from the target return. SBB is not suitable for investors with long-term buying and holding strategies.

The comments, opinions and analysis expressed here are for reference only and should not be regarded as personal investment advice or advice on investing in any securities or adopting any investment strategy. Although we believe that the information provided here is reliable, we do not guarantee its accuracy or completeness. The views and strategies described in our content may not be suitable for all investors. Due to the rapidly changing market and economic conditions, all comments, opinions and analyses contained in our content are presented on the date of publication and may change without notice. This material is not intended to provide a complete analysis of every important fact about any country, region, market, industry, investment or strategy.

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