Various macroeconomic headwinds have plagued the board markets since the start of the year. Supply chain shortages, geopolitical turmoil, decades-high inflation and the relentless warmongering of the Fed did not allow the markets to take a break.
Despite this turmoil, high demand and tight supplies have driven up the price of energy, helping businesses operating in this space to thrive. Thus, investors sought refuge in this relatively stable sector to ride out the storm.
The utilities sector has also caught the attention of investors due to its resilience to economic cycles.
However, the promising outlook for these stocks creates problems for leveraged inverse ETFs with short positions in components of the energy and utilities sector. Thus avoiding Direxion Daily Energy Bear 2X Shares (ERY) and ProShares UltraShort Utilities (PDS) would be wise.
Direxion Daily Energy Bear 2X Shares (ERY)
ERY is an exchange-traded fund launched by Direxion Investments. Rafferty Asset Management, LLC manages this fund. Through derivatives, it seeks to provide 2x daily inverse exposure to a market capitalization-weighted index of energy companies derived from the S&P 500. And it includes sectors such as oil, gas, consumable fuels and energy equipment and services.
ERY tracks the Energy Select Sector Index. With $52.12 million in assets under management, ERY’s top holding is the US dollar, which has a 61.73% weighting in the fund, followed by Dreyfus Government Cash Management Funds Institutional (DGCXX) at 24 .53%, and Goldman Sachs Trust Financial Square Treasury Instruments Fund Institutional (FTIXX) at 7.98%.
The fund’s expense ratio is 0.99%. ERY has not paid a dividend for the past nine quarters. Since it is designed for short-term trading and is rebalanced daily, its long-term returns are unpredictable. In the last six months and last year, its cash flow reached negative $1.75 million and $18.42 million, respectively. It has a beta of minus 3.61.
ERY is down 27.6% over the past six months and 75.5% over the past year to close the last trading session at $40.46. His NAV was $40.50 to September 6, 2022.
ERY’s poor performance is confirmed by a POWR Rankings of D, which is equivalent to a sale in our proprietary rating system. POWR ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
ERY has an F rating for trade and buy and hold. It has a D grade for peers. In the Inverse Equity ETFs category, it is ranked #40 out of 50 funds.
Click here to see all POWR odds for ERY.
ProShares UltraShort Utilities (PDS)
SDP is an exchange-traded fund launched and managed by ProShare Advisors LLC. The fund provides 2x inverse leveraged exposure to the Dow Jones US Utilities Index (DJUSUT), a market capitalization-weighted index of approximately 64 utilities companies ranked by S&P Dow Jones.
With $3.80 billion in assets under management, SDP’s entire holdings are in US dollars, raising the question of whether the 0.95% expense ratio is worth it. Additionally, the fund has not paid dividends in the past nine quarters. In the last six months and last year, its fund flows amounted to $3.05 million and $2.31 million, respectively. He has a beta minus 0.57.
SDP has fallen 14.5% over the past six months and 27.2% over the past year to close the latest trading session at $10.47. His NAV was $10.49 to September 6, 2022.
Our skepticism of the SDP is underscored by an overall POWR rating of D, which equates to a sell in our proprietary rating system. SDP was rated D for Trade, Buy and Hold and Peer. In the In the ETF Inverse Equities category, it is ranked No. 41 out of 50 funds.
Click here to see all POWR odds for SDP.
ERY shares were up $0.05 (+0.12%) in after-hours trading on Wednesday. Year-to-date, ERY is down -62.65%, compared to a -15.63% rise in the benchmark S&P 500 over the same period.
About the Author: Santanu Roy
Fascinated by the traditional and evolving factors that influence investment decisions, Santanu decided to pursue a career as an investment analyst. Prior to moving into investment research, he was a process associate at Cognizant. With a master’s degree in business administration and a fundamental approach to business analysis, he aims to help retail investors identify the best long-term investment opportunities. After…