Seeking Short-Term Opportunities? ETFs for Tactical Investors
The resumption of crude shipments through the Strait of Hormuz following a ceasefire has contributed to a decline in oil prices, improving investor sentiment. While easing oil prices have improved the near-term economic outlook, lingering geopolitical risks suggest that markets could remain volatile in the short term.
Recent weakness in the technology sector and the Personal Consumption Expenditures (PCE) index’s three-year high have tempered investor optimism. Signs of investor anxiety can also be seen in the CBOE Volatility Index (VIX), which reflects market expectations of near-term volatility. The volatility index has gained 17.35% over the past five trading sessions and 43.20% over the past six months.
However, the broader market continues to offer reasons for optimism. Despite bouts of volatility throughout the year, the broader market has remained remarkably resilient, prompting several Wall Street brokerages to raise their year-end S&P 500 targets. Additionally, falling oil prices keep investors hoping for easing inflationary pressures.
Given the current macroeconomic backdrop, forecasting long-term market trends has become increasingly challenging as investors navigate shifting monetary policy, geopolitical risks and evolving economic data. Instead, investors may find greater opportunities by focusing on shorter-term opportunities.
That said, such tactical strategies are generally better suited for investors with a higher risk tolerance who actively monitor market developments and are prepared to adjust their positions as conditions evolve.
ETFs for Tactical Plays
For investors seeking short-term tactical exposure in today’s market, the following ETFs and investment themes may be worth considering.
Volatility ETFs
Increasing exposure to volatility ETFs in the short term can be a winning move for investors. Volatility ETFs are a compelling tool for managing near-term risks. Beyond serving as a hedge against potential market drawdowns, these funds can also benefit from periods of elevated uncertainty and rising volatility.
When it comes to risk management, anticipating risk is often more effective than reacting after losses have already materialized, making investing in volatility ETFs a good tactical hedge. Investors can consider iPath Series B S&P 500 VIX Short-Term Futures ETN VXX and ProShares VIX Short-Term Futures ETF VIXY.
Inverse Technology ETFs
The AI trade continues to lose momentum as concerns over escalating costs of AI infrastructure weigh on investor sentiment. At the same time, expectations of a more hawkish Fed have added to the pressure on growth-oriented technology stocks. As a result, the Nasdaq Composite has declined about 4% over the past five trading sessions and 4.63% over the past month, highlighting the recent weakness across the sector. The tech-heavy index fell 0.46% on Thursday.
According to CNBC, investor concerns were further amplified after Apple announced price increases for its MacBook and iPad lineup, citing higher component costs, particularly semiconductors. The move has fueled fears that soaring chip prices and rising AI infrastructure costs could eventually erode profit margins across the technology sector.
In this backdrop, investors can consider increasing exposure to ETFs inversely tracking the market. Investors can consider ProShares UltraPro Short QQQ SQQQ and ProShares Short QQQ PSQ.
Inverse ETFs create an inverse short position in the underlying index through the use of swaps, options, futures contracts and other financial instruments. Investors should note that these products are best suited for short-term tactical positioning and trading, as they are rebalanced daily.
A Tactical Trade on Inflation
The latest inflation report provided little relief for investors hoping for a more dovish Fed. As quoted on Yahoo Finance, the PCE Index, the Fed’s preferred inflation gauge, accelerated to 4.1% year over year in May from 3.8% in April, matching market expectations.
On a monthly basis, prices increased 0.4%, matching April’s pace while coming in slightly below forecasts. The persistent inflationary backdrop is expected to keep the Fed cautious, reinforcing expectations of a prolonged higher-for-longer interest rate environment. Per the article, while higher energy prices contributed to the increase in headline inflation, core inflation also accelerated, indicating that price pressures became more broad-based and extended beyond energy-related components in May.
Inverse Gold ETFs
The prospect of a hawkish Fed and interest rates remaining higher for longer remains a key headwind for non-yielding assets such as gold. The price of the yellow metal is down about 3.83% over the past five trading sessions and 10.27% over the past month. As such, investors can consider increasing exposure to inverse gold ETFs like ProShares UltraShort Gold GLL and MicroSectors Gold Miners -3X Inverse Leveraged ETNs GDXD.
Additionally, expectations of a more hawkish Fed stance also make the greenback stronger. Higher U.S. interest rates can strengthen the dollar by increasing its yield advantage and boosting demand for FX carry trades.
Bullish U.S. Dollar ETFs
The U.S. Dollar Index (DXY) has gained 0.38% over the past five trading sessions and 2.14% over the past month. The index is also up 3.02% year to date. As such, investors can consider increasing exposure to ETFs positioned to benefit from a strengthening dollar. Investors can consider Invesco DB US Dollar Index Bullish Fund UUP and WisdomTree Bloomberg U.S. Dollar Bullish Fund USDU.
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iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX): ETF Research Reports
Invesco DB US Dollar Index Bullish ETF (UUP): ETF Research Reports
ProShares VIX Short-Term Futures ETF (VIXY): ETF Research Reports
WisdomTree Bloomberg U.S. Dollar Bullish ETF (USDU): ETF Research Reports
Proshares Short QQQ (PSQ): ETF Research Reports
ProShares UltraPro Short QQQ (SQQQ): ETF Research Reports
This article originally published on Zacks Investment Research (zacks.com).