The U.S. small-cap equity market includes common stocks of companies in the United States with a market capitalization between $300 million and approximately $2 billion. The main benchmarks tracking the U.S. small-cap equity market are the Russell 2000 Index and the Standard & Poor's Small-Cap 600 Index.
Investors who are bearish on U.S. small-cap equities may gain exposure by investing in inverse exchange-traded funds (ETFs) or inverse leveraged ETFs. However, investors should note that when considering inverse ETFs, they should not hold the ETFs for periods longer than one day, because returns may deviate substantially from the target return percentage. Those wishing to gain inverse exposure to the U.S. small-cap equity market should consider the following three inverse ETFs that provide exposure to the Russell 2000 Index and Standard & Poor's Small-Cap 600 Index.
ProShares Short SmallCap600 ETF
The ProShares Short SmallCap600 ETF (NYSEARCA: SBB) seeks to provide investment results corresponding to the inverse performance of the S&P Small-Cap 600 Index over one day. The fund was issued by ProShares on Jan. 23, 2007. SBB charges an annual net expense ratio of 0.95%, which is in line with the average of its category of trading-inverse equity funds. The fund aims to achieve its investment objective by investing in derivative securities that its investment manager believes, collectively, should have similar daily returns as the inverse of its benchmark index. SBB primarily holds index swaps issued by various counterparties on its benchmark index.
As of March 31, 2016, when measured against the Russell 2000 Index, the fund's best-fit index, the fund had an R-squared of 97.97% over the previous three years, which indicates that 97.97% of its historical price movements over this period could be explained by movements in the best-fit index. Additionally, it had a beta of -0.95, which suggests that it was negatively correlated to the Russell 2000 Index. SBB had a Sharpe ratio of -0.91 and an average annual standard deviation, or volatility, of 13.91%
ProShares Short Russell2000 ETF
The ProShares Short Russell2000 (NYSEARCA: RWM) is an inverse ETF that seeks to provide exposure to the Russell 2000 Index, its benchmark index. The Russell 2000 Index measures the performance of U.S. small-cap stocks. The benchmark is a float-adjusted and market cap-weighted index consisting of approximately 2,000 of the smallest constituents in the Russell 3000 Index. The fund charges an annual net expense ratio of 0.95%, which is in line with that of its category average.
To achieve its investment objective of providing investment results that correspond to the inverse of one times the daily performance of the index, the fund primarily invests in index swaps on the benchmark index. As of March 31, 2016, when measured against its benchmark index, RWM had an R-squared of 99.85% and a beta of -0.99. The fund had an average annual standard deviation of 15.16% and a Sharpe ratio of -0.64. Its Sharpe ratio indicates it underperformed risk-free assets over the past three years.
ProShares UltraShort Russell2000
The ProShares UltraShort Russell2000 (NYSEARCA: TWM) is an inverse leveraged ETF that seeks to provide investment results that correspond to the inverse of two times the daily performance of the Russell 2000 Index, which is its benchmark index. The fund primarily holds index swaps and cash to provide inverse leveraged exposure to the index.
As of March 31, 2016, based on trailing three-year data, the fund had a beta of -1.96 and an R-squared of 99.63%, when measured against its benchmark index. Therefore, 99.63% of its historical price movements over this period could be explained by movements in the Russell 2000 Index. Its beta of -1.96 indicates that it is theoretically 1.96 times as volatile and negatively correlated to the benchmark. Over the three-year period, the fund had an average annual standard deviation of 30.05% and a Sharpe ratio of -0.64. Therefore, on a risk-adjusted basis, the fund has historically underperformed the risk-free rate of return.