Various macro headwinds have embattled board markets since the beginning of the year. Supply chain shortages, geopolitical turbulence, decades-high inflation, and the Fed’s unrelenting hawkishness have not allowed the markets to catch a break.
Notwithstanding this choppiness, substantial demand and restricted supplies have been driving up the price of energy, helping companies operating in this space thrive. So, Investors have been seeking refuge in this relatively stable sector to ride out the storm.
The utility sector has also attracted investor attention because of its resilience to economic cycles.
However, the promising prospects of these stocks spell trouble for leveraged inverse ETFs with short positions in the constituents of the energy and utility sector. Hence avoiding Direxion Daily Energy Bear 2X Shares (ERY) and ProShares UltraShort Utilities (SDP) 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 derivative instruments, it seeks to provide daily 2x inverse exposure to a market-cap-weighted index of energy companies derived from the S&P 500. And it includes industries such as oil, gas, consumable fuels, and energy equipment and services.
ERY tracks Energy Select Sector Index. With $52.12 million in AUM, ERY’s top holding is the U.S. 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 expense ratio of the fund is 0.99%. ERY has not paid a dividend for the past nine quarters. Since it is designed for short-term trading and rebalances daily, its long-term returns are unpredictable. Over the past six months and the past year, its fund flows came in at negative $1.75 million and $18.42 million, respectively. It has a beta of negative 3.61.
ERY has declined 27.6% over the past six months and 75.5% over the past year to close the last trading session at $40.46. Its NAV was $40.50 as of September 6, 2022.
ERY’s poor performance is confirmed by an overall POWR Ratings of D, which equates to a Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
ERY has a grade of F for Trade and Buy and Hold. It has a D grade for Peers. Within the Inverse Equities ETFs category, it is ranked #40 among 50 funds.
Click here to see all POWR Ratings for ERY.
ProShares UltraShort Utilities (SDP)
SDP is an exchange-traded fund launched and managed by ProShare Advisors LLC. The fund provides 2x inverse leveraged exposure to the Dow Jones U.S. Utilities Index (DJUSUT), a market-cap-weighted index of about 64 utility firms classified by S&P Dow Jones.
With $3.80 billion in AUM, SDP’s entire holding is in U.S. Dollars, raising the question of whether the expense ratio of 0.95% is worth it. Moreover, the fund has not paid dividends for the past nine quarters. Over the past six months and the past year, its fund flows came in at $3.05 million and $2.31 million, respectively. It has a beta of negative 0.57.
SDP has plummeted 14.5% over the past six months and 27.2% over the past year to close the last trading session at $10.47. Its NAV was $10.49 as on September 6, 2022.
Our skepticism regarding SDP is underscored by an overall POWR Rating of D, which equates to a Sell in our proprietary rating system. SDP has been graded D for Trade, Buy and Hold, and Peer. Within the Inverse Equities ETFs category, it is ranked #41 among 50 funds.
Click here to see all POWR Ratings for SDP.
ERY shares rose $0.05 (+0.12%) in after-hours trading Wednesday. Year-to-date, ERY has declined -62.65%, versus a -15.63% rise in the benchmark S&P 500 index during the same period.
About the Author: Santanu Roy
Having been fascinated by the traditional and evolving factors that affect investment decisions, Santanu decided to pursue a career as an investment analyst. Prior to his switch to investment research, he was a process associate at Cognizant. With a master's degree in business administration and a fundamental approach to analyzing businesses, he aims to help retail investors identify the best long-term investment opportunities.
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