U.S. markets have remained volatile so far this year. In spite of the persistent macroeconomic and geopolitical uncertainties, investors have largely shrugged off the headwinds, keeping markets remarkably resilient. The S&P 500 gained about 0.89% on Tuesday. It has risen about 0.3% over the past month and 9.2% year to date.
That resilience, however, does not necessarily mean the risks have diminished. Investors may be underestimating the challenges facing the economy and overlooking downside risks that could pressure U.S. equities in the months ahead.
The broad market index is down around 0.7% over the past five trading sessions, with the CBOE Volatility Index (VIX) gaining around 2.1% in a single trading session.
The volatility index, which reflects market expectations of near-term volatility, is down around 0.5% over the past month but has added around 17.2% year to date. Reinforcing these concerns, JPMorgan Chase CEO Jamie Dimon recently warned that investors are underestimating global economic risks and said he would refrain from buying equities at current valuations.
Dimon Warns of Growing Risks
Speaking with Wilfred Frost, as quoted on CNBC, Dimon argued that markets are not fully pricing in a growing range of geopolitical and fiscal headwinds. Per Dimon, sustained U.S. budget deficits may become increasingly difficult to finance, potentially resulting in higher interest rates.
The national deficit stands at around $1.37 trillion year to date this fiscal, up about 2% from the same period a year ago. Meanwhile, the national debt has risen to roughly $39.59 trillion.
Dimon also pointed to the Ukraine-Russia war and the Middle East conflicts, escalating U.S.-China tensions, along with increasing military spending amid rising government deficits, arguing that markets are failing to fully appreciate the magnitude of these risks.
While acknowledging that the global economy has become more resilient, Dimon warned that it remains vulnerable to a sudden shift in conditions.
Inverse ETFs to Consider
Below, we have highlighted a few inverse equity ETFs that could appeal to investors expecting persistent macroeconomic uncertainty to weigh on U.S. equities, making short-term downside positioning increasingly attractive.
Inverse ETFs create an inverse short position in the underlying index through the use of swaps, options, futures contracts and other financial instruments. However, these funds run risks of huge losses compared with traditional funds. Investors should note that these products are best suited for short-term trading, as they are rebalanced daily. Additionally, limited liquidity can increase trading costs beyond what they initially appear.
Investors can consider ProShares Short S&P500 SH and Direxion Daily S&P 500 Bear 1X ETF SPDN.
Regarding annual fees, SPDN is the cheapest option, charging 0.48%. SH has gathered an asset base of $955.3 million, the largest asset between the two options. With an average one-month trading volume of around 41.45 million shares, SPDN is the most liquid option.
Inverse-Leveraged ETFs to Play
Investors with a higher risk tolerance may consider leveraged inverse ETFs to magnify bearish bets. ProShares UltraPro Short S&P500 SPXU, ProShares UltraShort S&P 500 SDS and Direxion Daily S&P 500 Bear 3X ETF SPXS can be considered.
Regarding annual fees, SPXU is the cheapest option, charging 0.90%. With an average one-month trading volume of about 9.73 million shares, SPXS is the most liquid option.
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ProShares UltraShort S&P500 (SDS): ETF Research Reports
ProShares UltraPro Short S&P500 (SPXU): ETF Research Reports
ProShares Short S&P500 (SH): ETF Research Reports
Direxion Daily S&P 500 Bear 3X ETF (SPXS): ETF Research Reports
This article originally published on Zacks Investment Research (zacks.com).