The lower-than-expected inflation data for October led to widespread optimism among investors that the Federal Reserve may limit the interest rate hike in its upcoming meeting to 50 basis points. Following the release of the CIP data last week, the indexes posted their biggest intraday gains in more than two years.

However, since inflation is still far above the level accepted by the Fed, the rate hikes are expected to continue for a while. According to Dallas Fed President Lorie Logan, “CPI data were a welcome relief, but there is still a long way to go.”

Moreover, big tech companies are freezing their hiring process and laying off their employees as ongoing macroeconomic headwinds and tight business budgets force them to restructure their operations. After Meta Platforms Inc. (META) and Twitter, Amazon.com, Inc. (AMZN) is joining the list of tech majors to announce layoffs.

With market volatility expected to continue in the near term, it could be wise to buy ProShares Short S&P 500 ETF (SH) and avoid Direxion Daily Small Cap Bull 3x Shares ETF (TNA).

ETF to Buy:

ProShares Short S&P 500 ETF (SH)

SH is an inverse exchange-traded fund launched and managed by ProShare Advisors LLC. It is designed to deliver inverse exposure to the S&P 500, a market cap-weighted basket of 500 large-cap US firms selected by the S&P Index Committee, for one trading day.

With $2.89 billion in AUM, SH’s holdings primarily consist of United States Treasury Bills of varying maturities. The fund’s expense ratio is 0.88%, lower than the category average of 1.02%. The fund’s net inflow came in at $29.03 million over the past six months and $1.05 billion over the past year. It has a beta of negative 0.9.

The ETF has gained 14.8% year-to-date to close the last trading session at $15.55. The NAV was $15.55 as of November 14, 2022.

SH’s upside potential is reflected in its POWR Ratings. The ETF has an overall rating of B, which equates to a Strong Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

SH has an A grade for Peer and a B for Trade and Buy & Hold.

SH tops the list of 50 funds in the Inverse Equities ETFs category.

ETF to Avoid:

Direxion Daily Small Cap Bull 3x Shares ETF (TNA)

Direxion Investments launched TNA. Rafferty Asset Management, LLC currently manages the fund. It gives 3x leveraged exposure to 2000 US small-cap companies as defined by the Russell 2000. The underlying index contains the 1001st through the 3000th securities pulled from the Russell 3000 Index.

With $1.22 billion in AUM, TNA’s top holding is iShares Russell 2000 ETF (IWM), which has a 69.56% weighting in the fund. It is followed by Dreyfus Government Cash Management Funds Institutional (DGCXX) at 17.32% and Goldman Sachs Trust Financial Square Treasury Instruments Fund Institutional (FTIXX) at 13.37%. It has a total of 5 holdings.

TNA has an expense ratio of 1.05% compared to the category average of 1.02%. The fund has yet to pay any dividends for the previous seven quarters. Over the last five days, its net outflow came in at $1.4 million. It has a beta of 3.62.

Due to pullbacks triggered by macroeconomic and geopolitical headwinds for the better part of the year, TNA has slumped 56% year-to-date to close the last trading session at $38.61. Its NAV was $39.84 as on November 11, 2022.

TNA’s risks are reflected in its overall rating of F, which equates to a Strong Sell in our POWR Ratings system. The fund also has a grade of F for Trade and Buy & Hold and a D for Peer.

TNA is ranked #54 of 101 funds in the F-rated Leveraged Equities ETFs category.

SH shares were trading at $15.39 per share on Tuesday afternoon, down $0.16 (-1.03%). Year-to-date, SH has gained 13.00%, versus a -15.03% rise in the benchmark S&P 500 index during the same period.

About the Author: Santanu Roy

Having been fascinated by the traditional and evolving factors that affect investment decisions, Santanu decided to pursue a career as an investment analyst. Prior to his switch to investment research, he was a process associate at Cognizant. With a master's degree in business administration and a fundamental approach to analyzing businesses, he aims to help retail investors identify the best long-term investment opportunities. More...

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