3 Strategic ETFs for Bearish Investors Post-Election

Key Points

• Uncertainty surrounding the policies and impacts of the incoming presidential administration has lingered following the election.
• If markets decline heading into the new year, investors should be prepared to find ways to capitalize on this movement.
• Inverse leveraged ETFs are a powerful—though risky—opportunity to take advantage in this case.

Following the 2024 U.S. election, there has been a great deal of speculation about how a second Trump administration will set policies that have an impact on the economy. Some have taken a strongly optimistic view of what's to come—a recent Goldman Sachs report suggested that the likelihood of a recession has diminished along with inflation levels and that anticipated changes to tariffs, immigration, and other policies are not likely to dampen economic growth.

Investors subscribing to that view of the broader trajectory of the U.S. economy in the coming quarters are likely to look for ways to capitalize on that growth with their investments, whether through individual stocks, exchange-traded funds (ETFs), or a host of other vehicles. On the other hand, other investors see cause for concern.

Bearish investors worry that tariffs in the new administration could be higher and much more wide-ranging than in the previous Trump administration, with the potential for negative impacts on consumer spending, prices, and inflation. A loose regulatory environment may prompt unexpected shifts in the way that businesses structure themselves, while mass deportation could disrupt the economy by quickly removing a large number of workers at once.

If you're among the investors taking a bearish perspective, there are a number of ways to position your investments to benefit from a market downturn. Inverse leveraged ETFs are among the most powerful options in this case.

ProShares UltraPro Short S&P 500: Reasonable Fee for Short-Term Bearish Plays

The ProShares UltraPro Short S&P 500 NYSEARCA: SPXU provides broad short exposure to the S&P 500 Index, allowing investors to capitalize when the index declines. SPXU employs leverage in an effort to reach three times the inverse of the daily S&P 500 performance. Thus, when the S&P falls over the course of a day, SPXU holders benefit.

Tracking the S&P 500 in this way allows investors to make a bearish bet on the broader market without having to resort to shorting individual stocks, industries, or sectors. However, given the way that SPXU employs leverage, it is only designed to track the S&P's performance on a daily basis. This means that it is suitable only for active investors trading in and out regularly, not for buy-and-hold investors.

With the need for frequent trading built into SPXU's structure, it's no surprise that it has strong liquidity based on a 1-month average trading volume of nearly 9.5 million. And though investors should expect to pay a premium for an inverse leveraged fund, SPXU's expense ratio of 0.89% is quite reasonable compared to some of its competitors on both the long and short side.

ProShares UltraShort Russell2000: Ready for a Decline in Small-Caps

The Russell 2000 Index of small-cap stocks has climbed by more than 8% in the last month as investors have been generally optimistic about the future environment of lowered taxes and increased focus on domestic business. However, this group of stocks is also heavily impacted by inflation and could easily turn in the other direction.

If that happens, the ProShares UltraShort Russell2000 NYSEARCA: TWM may be a good option for investors expecting further declines. Like SPXU, this fund offers inverse leveraged exposure, though in this case, the target index is the Russell 2000. Also, similarly to SPXU, TWM is designed for daily trades. It provides 2x inverse exposure and has a comparable expense ratio, but the fund has relatively low asset levels, which may contribute to instability.

ProShares UltraShort MSCI Emerging Markets: Prepared in Case Trade Policy Hurts EMs

A report by Citigroup suggests that the trade policies of the incoming administration may be detrimental to emerging markets. Investors supporting this view might look to the ProShares UltraShort MSCI Emerging Markets NYSEARCA: EEV, another 2x daily short leverage fund targeting the roughly 1,300-member MSCI Emerging Markets Index.

While this fund does not offer a way of targeting a single country, it does include a representative sample of different industries, sectors, and geographic regions.

Beware the Risk

Leveraged funds tend to have much higher risk levels compared with other ETFs. Bearish investors not prepared to take on that risk might compare them to non-leveraged inverse funds, for example, or to other short strategies. Still, those willing to assume the risk also stand to reap significant benefits if their bet pays off.