Small-cap stocks came under selling pressure Friday as some states reintroduce restrictions to curb the spread of rising coronavirus cases. For instance, several key jurisdictions – including California, Washington, Nevada, Michigan, and New Mexico – have either ordered restaurants and bars to close or reduce patron numbers while also introducing statewide mandates for wearing a face mask in public.
Meanwhile, public health experts have asked Texas Governor Greg Abbot to reconsider another shutdown in some regions of his state. The disease continues to infect many more people in Texas than it did two months ago and has claimed 1,000 fatalities in the past six days.
Those who anticipate further downside in small-cap stocks should monitor these three inverse exchange-traded funds (ETFs) that move in the opposite direction to the Russell 2000 Index. Below, we review the metrics of each fund and analyze the charts to identify several tactical trading ideas.
ProShares Short Russell2000 (RWM)
With assets under management (AUM) of $512 million and charging a 0.95% management fee, the ProShares Short Russell2000 (RWM) aims to provide similar investment results to the inverse daily return of the Russell 2000 Index. Health care and financials make up more than 30% of the underlying benchmark, making the fund a suitable product for those wanting short exposure to these sectors. The ETF turns over 3 million-plus shares per day on narrow penny spreads to minimize transaction costs. As of July 27, 2020, RWM offers a 0.93% dividend yield and has slipped 5.62% on the year. Over the past three months, the fund is trading 22% lower.
The most recent low sits roughly in line with the early June swing low, setting up a double bottom possibility. Additionally, the relative strength index (RSI) has formed a relatively shallower trough compared to the fund's price to create a bullish divergence. Swing traders who buy at these levels should place a stop-loss order beneath this month's low at $34.33 and book profits on a move to horizontal line resistance at $38.80.
ProShares UltraShort Russell2000 (TWM)
The ProShares UltraShort Russell2000 (TWM) has an objective to return twice the inverse daily performance of the Russell 2000 Index – the same benchmark used by RWM. The added leverage allows traders to take a more aggressive bet against smaller publicly listed companies listed on U.S. exchanges. Average daily dollar volume of almost $50 million and tight bid-ask spreads make the fund a popular choice among active traders. The fund's pricey 0.95% expense ratio is less important, given its short-term tactical mission. TWM controls $133.61 million in net assets, yields 1.03%, and has dropped 35.59% year to date as of July 27, 2020. Since late April, the ETF has plummeted over 40%.
The fund broke beneath the 2020 low in Thursday's session but promptly reversed to close the week above this closely watched level – indicating a possible head-fake trade. Like RWM, a bullish divergence between the ETF's price and RSI hints of fading seller momentum. Those who take a long position should set a take-profit order near $14, where the fund finds significant overhead resistance from the September 2019 swing low and 200-day simple moving average (SMA). Manage risk by setting a stop under the July 23 low at $9.31 and amending it to the breakeven point if the price climbs above intermediate resistance at $12.
ProShares UltraPro Short Russell2000 (SRTY)
Launched in 2010, the ProShares UltraPro Short Russell2000 (SRTY) aims to deliver three times the inverse daily return of the Russell 2000 Index. To achieve its objective, the fund invests its $182.93 billion asset base in a range of ETF and index swaps as well as other financial instruments. Due to the compounding of daily returns, holding periods greater than one day can deliver results that deviate significantly from the targeted leverage. Turnover of more than 8 million shares per day on an 0.09% average spread provides excellent liquidity for a highly leveraged ETF. As of July 27, 2020, SRTY charges a 0.95% management fee, yields 2.02%, and is trading 60% lower so far this year.
A possible double bottom/head-fake combo provides a high-risk, high-reward opportunity for experienced traders. In terms of order management, consider banking profits near $17, where price may run into overhead resistance from the January and February swing lows. Cut losses if the fund fails to hold above the current 52-week low at $9.11. The trade offers a favorable 1:8.75 risk/reward ratio, assuming a fill at Friday’s $9.91 close ($0.81 risk per share vs. $7.09 profit per share).