February was the month of heightened volatility as rising concerns over faster-than-expected rates hike continued to shake the complacency off the stock market. This is especially true as the CBOE Volatility Index (VIX), also known as the fear gauge, traded in a wide range of high of more than 50 to a low of 12.50. The Dow Jones Industrial Average also saw wild swings of 1,600 and 1,200 in the first week of February — the two biggest intraday ranges in its history.  

While the equity market suffered the worst decline in many years on some occasion during the month, commodities like gold and oil also continued to show their volatility. U.S. crude futures dropped from a three-year high of more than $66 per barrel to a low of under $60 per barrel during the month. For gold, while rising yields diminished the attractiveness of the yellow metal since it does not pay interest like fixed-income assets, a drive to hedge against inflation pushed investors to gold.

The fixed income space was also out of investors’ favor, piling up heavy losses with rising yields. The two-year yields climbed to the highest level in nearly 10 years at 2.274% and 10-year yields jumped to the highest level in more than four years to above 2.9%.

Given the downside sentiments and higher volatility, inverse or leveraged inverse ETFs gained immense popularity last month as investors embraced these products for big gains in a short span. In fact, many products provided outsized gains (over 20%) last month, though these involve a great deal of risk when compared to traditional products. These products either create an inverse long/short position or leveraged inverse long/short position in the underlying index through the use of swaps, options, future contracts and other financial instruments.

Below we have highlighted five such ETFs that generated handsome returns last month and should continue to do so at least for the near term if the sentiments remain volatile.

Direxion Daily Gold Miners Index Bear 3x Shares (DUST - Free Report) – Up 29.4%

Acting as a leveraged play on gold, gold miners tend to experience more losses than their bullion cousins in a declining metal market. DUST seeks to deliver three times (3x or 300%) the inverse daily performance of the NYSE Arca Gold Miners Index. The fund has amassed $280.1 million in its asset base and trades in heavy average volume of more than 5.9 million shares. It charges investors 95 bps in annual fees and expenses.

Direxion Daily Natural Gas Related Bear 3X Shares (GASX - Free Report) – Up 28.4%

This product provides three times inverse exposure to the ISE-Revere Natural Gas Index. It has amassed $4.9 million in its asset base and trades in light volume of 21,000 shares a day on average. The ETF charges 95 bps in fees per year.

Direxion Daily Energy Bear 3x Shares ETF (ERY - Free Report) – Up 27.2%  

This product provides three times inverse exposure to the Energy Select Sector Index. It is extremely popular and trades in solid volume 953,000 shares. The ETF charges annual fee of 95 bps and has AUM of $30.6 million.

Direxion Daily MSCI Real Estate Bear 3X Shares (DRV - Free Report) – Up 23.8%

This product seeks to deliver three times inverse performance of MSCI US REIT Index, charging investors’ 95 bps in expense ratio. It has AUM of $15.2 million and average daily volume of around 77,000 shares.

Direxion Daily S&P Oil & Gas Exp. & Prod. Bear 3X Shares (DRIP - Free Report) – Up 20.7%

This fund seeks three times inverse exposure of the performance of the S&P Oil & Gas Exploration & Production Select Industry Index. DRIP has accumulated $33.2 million in its asset base and trades in a solid volume of around 1.2 million shares a day on average. The fund charges 95 bps in annual fees.

Bottom Line

While this strategy is highly beneficial for short-term traders, it could lead to huge losses compared to traditional funds in fluctuating or seesawing markets. Further, their performances could vary significantly from the actual performance of their underlying index over a longer period when compared to the shorter period (such as, weeks or months) due to their compounding effect.

Still, for ETF investors who are bearish on equities for the near term, any of the above products could make an interesting choice. Clearly, a near-term short could be intriguing for those with high-risk tolerance, and a belief that the “trend is the friend” in this corner of the investing world.