To The Moon

As I scrolled through my watchlist on Tiger Brokers, I noticed an interesting pattern: I’ve arranged the stocks from the largest percentage declines to the biggest gains, so the ones at the top reflect the steepest drops. Yesterday, with the US stock market being bullish, I realized something striking: the stocks sitting at the top of my list were inverse ETFs.

A Look at SOXS: The Semiconductors Bear 3X ETF

At the very top of my list was SOXS, the Direxion Daily Semiconductors Bear 3X Shares ETF. For those unfamiliar, inverse ETFs like SOXS are designed to move in the opposite direction of a specific index or sector, and the “3X” means it provides three times the inverse exposure. So, when the semiconductor sector goes up, SOXS is meant to go down at three times the rate.

Yesterday, SOXS dropped a significant 21.63%, which is especially large given it’s a 3X inverse ETF. This decline reflects the risk associated with leveraged inverse ETFs: when the broader market, or in this case, the semiconductor sector, is bullish, these funds experience sharp and rapid declines.

Direxion Daily Semiconductors Bear 3x Shares (SOXS)

A Look at HIBS

Following closely in terms of decline was HIBS, the Direxion Daily S&P High Beta Bear 3X Shares ETF, which focuses on providing 3X inverse exposure to the S&P 500’s more volatile stocks. HIBS fell by 16.46%, again showing the stark impact of a bullish market on these leveraged inverse ETFs.

Direxion Daily S&P 500 High Beta Bear 3X Shares (HIBS)

The Danger of Volatility: Why Inverse ETFs Are High-Risk?

SOXS and HIBS aren't typical investments for long-term growth; rather, they’re tools designed for short-term trading, typically used to profit from market downturns. The underlying risk with inverse ETFs lies in their volatility—as shown by the significant drops on my watchlist. Since they are leveraged, their price movements are amplified, which means gains can be large if timed correctly, but losses can be equally severe when the market moves in the opposite direction.

Inverse ETFs with leverage are inherently more volatile than regular ETFs. For instance, if the market is bullish for a sustained period, these ETFs can experience rapid declines. This makes them more suitable for short-term traders who are looking to capitalize on quick market changes, rather than long-term investors looking for steady growth.

A Cautionary Tale for Future Trades

Looking at these ETFs on my watchlist made me realize that, while inverse ETFs can be interesting to monitor, they come with substantial risks. If I were ever to consider investing in them, I'd need to be extremely cautious. Their volatility makes them ideal for short-term speculation, but dangerous for long-term investments.

It also reminds me how important it is to carefully evaluate the market conditions before jumping into these types of funds. If the market is trending upward, an inverse ETF is more likely to result in significant losses, especially with leveraged exposure like that of SOXS and HIBS.

Conclusion: Proceed with Caution

If I decide to add these kinds of ETFs to my portfolio in the future, I’ll need to approach them with a clear short-term strategy. Their high volatility and reliance on market timing mean they’re not suitable for passive investing or long-term holds. Instead, they are more of a tool for those who actively monitor and react to market movements.

For now, I’ll keep these ETFs on my watchlist, but they serve as a good reminder of the risks and rewards associated with leveraged inverse products. Inverse ETFs can be powerful tools when used correctly, but they require careful consideration and, most importantly, a strong understanding of the market dynamics at play.