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S&P 500 Marches Ahead to Set New Highs: ETFs to Tap

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The S&P 500 has been on a stellar ride, having climbed 50% since hitting lows in March. The benchmark has posted its longest winning streak since April 2019 — up for the seventh straight day — and is just less than 1% away from the high reached on Feb 19, 2020.

The solid trend is likely to continue given the current fundamentals. This is especially true given a combination of unprecedented levels of fiscal and monetary stimulus, positive developments in coronavirus vaccines, and recovering economic activities. In particular, the latest industry gauge indicates that U.S. manufacturing activity expanded in July at the fastest pace in 15 months. The unemployment rate dropped to 10.2% in July, below June's 11.1% mark.

Additionally, better-than-expected earnings releases and the rise in mergers and acquisitions led to a spike in the stock market. Further, the recent dollar weakness is a huge tailwind for the mega-cap companies, which derive most of their revenues from international markets. This is because a weak dollar has made dollar-denominated assets cheap for foreign investors, making U.S. multinationals more competitive and leading to increased profits. As such, companies having a higher percentage of international sales may outperform (read: 4 ETF Zones Making the Most of a Weakening Dollar).

The new executive orders signed by President Donald Trump aimed at extending the coronavirus relief will further act as a catalyst in driving the stocks higher.

How to Play?

Investors can tap the S&P 500’s potential to hit new highs by going long on the index. There are a number of leveraged products in the market that offer multiple exposures to the index through the use of swaps, options, future contracts and other financial instruments. Below we highlight those and some of the key differences in each.

PortfolioPlus S&P 500 ETF

This ETF offers 1.35 times (1.35X) exposure to the index and is the cheapest choice in the large-cap leveraged space, charging just 32 bps in annual fees. It has accumulated $25.2 million in its asset base and trades in a small volume of 4,000 shares a day on average. The fund has risen 20.3% over the past 13 weeks.

ProShares Ultra S&P500 ETF (SSO - Free Report)

This is the most popular and liquid ETF in the leveraged space with AUM of $2.7 billion and an average daily volume of around 2.1 million shares. The fund seeks to deliver 2X the return of the index, charging investors 0.90% in annual fees. It has surged 30.7% over the past 13 weeks (read: S&P 500 Turns Positive for 2020: 10 Top Stocks in ETF).

Direxion Daily S&P 500 Bull 2x Shares (SPUU - Free Report)

While this product also provides 2X exposure to the index, it charges a lower fee of 60 bps. It has a lower level of $18.3 million in AUM and sees a reduced volume of about 32,000 shares a day on average. SPUU has gained 30.4% over the past 13 weeks.

ProShares UltraPro S&P500 ETF (UPRO - Free Report)

This fund provides 3X exposure to the index with an expense ratio of 0.92%. The average trading volume is solid, exchanging nearly 8.5 million shares per day on average. It has amassed $1.6 billion in its asset base and is up 46.8% over the past 13 weeks.

Direxion Daily S&P 500 Bull 3x Shares (SPXL - Free Report)

Like UPRO, this fund creates a 3X long position in the S&P 500 Index with the same expense ratio. It has AUM of $1.5 billion and trades in an average daily volume of nearly 13.5 million shares. SPXL has gained 46.9% in the same timeframe.

Bottom Line

As a caveat, investors should note that these products are extremely volatile and suitable only for short-term traders. Additionally, the daily rebalancing, when combined with leverage, may make these products deviate significantly from the expected long-term performance figures (see: all the Leveraged Equity ETFs here).

Still, for ETF investors who are bullish on the S&P 500 in the near term, either of the above products can be an interesting choice. A near-term long could be intriguing for those with a high-risk tolerance, and a belief that the trend is the friend in this corner of the investing world.

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