Small cap stocks offer the potential for attractive returns, but they also tend to be more volatile than equities with larger market capitalizations. Companies considered part of the small cap universe generally have market values between $300 million and $2 billion. Unlike large U.S. corporations, small cap companies generally are heavily focused on the domestic economy for growth. Investors optimistic about the future growth of smaller companies can invest in a diverse basket of small cap stocks using a small cap exchange-traded fund (ETF). But investors concerned about an economic shock, or that the current steep U.S. recession may not end soon, can short small caps through an inverse small cap ETF.

Key Takeaways

  • The three inverse small cap ETFs to short small cap stocks are MYY, SBB, and RWM.
  • These ETFs use index swaps in order to provide inverse exposure to their underlying benchmarks.

Plunging stock prices earlier this year caused by rising fears over the coronavirus pandemic officially plunged U.S. equities into a bear market in 2020. The S&P 500 fell 33.8% between February 19 and March 23 of this year. But inverse small cap ETFs, which use various financial derivatives to provide short exposure to small cap stocks, rose significantly over the same period.

Inverse ETFs can be riskier investments than non-inverse ETFs, because they are only designed to achieve the inverse of their benchmark's one-day returns. You should not expect that they will do so on longer-term returns. For example, an inverse ETF may return 1% on a day when its benchmark falls -1%, but you shouldn't expect it to return 10% in a year when its benchmark falls -10%. For more details, see this SEC alert.

There are 3 inverse ETFs for shorting small cap stocks, excluding leveraged ETFs. While these ETFs rose significantly during the short bear market plunge earlier this year, they have fallen dramatically over the past 12 months as equities have recovered from the crash. The S&P 500 has provided a total return of 22.4% over the past year. The best-performing inverse small cap ETF, based on performance during the bear market earlier this year, is the ProShares Short Midcap 400 (MYY). We examine the 3 inverse ETFs to short small cap stocks below. All numbers in this story are as of September 1, 2020.

ETFs with very low assets under management (AUM), less than $50 million, usually have lower liquidity than larger ETFs. This can result in higher trading costs which can negate some of your investment gains or increase your losses.

ProShares Short Midcap 400 (MYY)

  • Performance from Feb. 19, 2020 to Mar. 23, 2020: 59.3%
  • Performance over 1-Year: -17.3%
  • Expense Ratio: 0.95%
  • Annual Dividend Yield: 0.66%
  • 3-Month Average Daily Volume: 15,382
  • Assets Under Management: $24.1 million
  • Inception Date: June 21, 2006
  • Issuer: ProShares

MYY provides short exposure to both small cap and mid cap stocks tracked by the S&P MidCap 400 Index. Technically, mid cap companies generally have market capitalizations between $2 billion and $10 billion. However, there is no strict dividing line between small cap and mid cap, with many brokers drawing their own lines between the two categories. This ETF thus provides exposure to many small cap stocks in addition to mid cap stocks. The ETF uses various index swaps to provide -1x exposure to the daily performance of its index. The fund's returns are compounded on a daily basis, which can lead to results that are significantly different from the target return when held for periods longer than a day. MYY is intended for sophisticated investors with a short-term time horizon. 

ProShares Short Small Cap 600 (SBB)

  • Performance from Feb. 19, 2020 to Mar. 23, 2020: 57.3%
  • Performance over 1-Year: -15.6%
  • Expense Ratio: 0.95%
  • Annual Dividend Yield: 0.59%
  • 3-Month Average Daily Volume: 18,705
  • Assets Under Management: $12.5 million
  • Inception Date: January 23, 2007
  • Issuer: ProShares

SBB offers short exposure to stocks tracked by the S&P SmallCap 600 Index, an index comprised of small cap U.S. equities. The ETF seeks to provide a return that is -1x the daily return of its index. It uses a variety of index swaps to provide the inverse exposure to small cap stocks. The fund's returns are compounded on a daily basis, resulting in results that may deviate significantly from the target return. SBB is intended for sophisticated investors able to monitor their holdings on a daily basis. 

ProShares Short Russell 2000 (RWM)

  • Performance from Feb. 19, 2020 to Mar. 23, 2020: 55.4%
  • Performance over 1-Year: -19.8%
  • Expense Ratio: 0.95%
  • Annual Dividend Yield: 1.02%
  • 3-Month Average Daily Volume: 2,418,570
  • Assets Under Management: $459.7 million
  • Inception Date: January 25, 2007
  • Issuer: ProShares

RWM offers short exposure to stocks tracked by the Russell 2000 Index, an index comprised of small cap U.S. equities. The ETF seeks to provide a return that is -1x the daily performance of its underlying benchmark. It uses a variety of index swaps in order to provide short exposure to some of the smallest equities in the U.S. equity market. The fund's returns are compounded on a daily basis, which leads to results that may significantly differ from the target return. SBB is not intended for investors with a long-term buy-and-hold strategy.