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S&P 500, Nasdaq at New Highs: 5 Top Leveraged ETFs at Mid Q3

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The third quarter so far has been very kind to the U.S. stock market amid the volatility triggered by an uneven economic recovery, a stalemate in Congress over another round of stimulus, and the country’s increasing trade tensions with China.

This is especially true as both the Nasdaq Composite Index and the S&P 500 Index have hit a series of new highs lately. Nasdaq hit a new milestone of 11,000 last month. The benchmark’s rally from 10,000 to 11,000 has been the fastest ever in 20 years. The benchmark hit 10,000 on Jun 10 and took 40 trading days to climb to the 1,000 point. Meanwhile, the S&P 500 saw a sharp rebound from the trough seen in March to a new peak in just 126 trading days, marking the fastest-ever recovery from a bear market in the history of the index (read: S&P 500 Hits New Record Highs: Top-Ranked ETF Winners).

The new highs are being driven by an unprecedented fiscal and monetary stimulus in response to the pandemic, hopes of a swift economic rebound and high chances of a successful coronavirus vaccine. Additionally, a booming technology sector, the rise in mergers and acquisitions, better-than-expected earnings and a weak dollar added to the strength.

The bullishness has led to huge demand for leveraged ETFs as investors seek to register big gains in a short span. Leveraged funds provide multiple exposure (i.e. 2X or 3X) to the daily performance of the underlying index by employing various investment strategies such as swaps, futures contracts and other derivative instruments. Due to their compounding effect, investors can enjoy higher returns in a very short period of time, provided the trend remains positive.

Below we highlight some leveraged equity ETFs that piled up handsome gains halfway through the third quarter. These funds will continue to be investors’ darlings provided the sentiments remain bullish.

Direxion Daily Homebuilders & Supplies Bull 3X Shares (NAIL - Free Report) — Up 101.2%

NAIL provides leveraged exposure to homebuilders and creates three times long position on the Dow Jones U.S. Select Home Construction Index. It charges an annual fee of 95 bps and trades in a solid average daily volume of about 1.6 million shares. The fund has accumulated $522.1 million in its asset base (read: ETFs to Tap as Homebuilder Index Hits High in 15 Years).

BMO REX MicroSectors FANG+ Index 3X Leveraged ETN (FNGU - Free Report) – Up 100.6%

This note seeks to offer three times leveraged exposure to the NYSE FANG Index, charging 95 bps in annual fees. The ETN has accumulated $601.5 million in its asset base and trades in average daily volume of 510,000 shares.

Direxion Daily Retail Bull 3X Shares (RETL - Free Report) – Up 72.9%

This ETF offers three times leveraged exposure to the S&P Retail Select Industry Index. The product has amassed about $39 million in its asset base, while charging 95 bps in fees per year. Its volume is lower as it exchanges around 18,000 shares a day on average.

Direxion Daily Transportation Bull 3X Shares (TPOR - Free Report) – Up 67.6%

TPOR targets the transportation sector and seeks to deliver thrice the daily performance of the Dow Jones Transportation Average. The product has AUM of $40.9 million and charges 95 bps in fees and expenses. It trades in lower volumes of about 225,000 shares per day (read: 5 Cyclical Sector ETFs Hitting New Highs).

Direxion Daily Consumer Discretionary Bull (WANT - Free Report) – Up 48%

This ETF seeks to offer three times exposure to the Consumer Discretionary Select Sector Index, charging 95 bps in annual fees. It has AUM of $15.9 million and average daily volume of 35,000 shares.

Bottom Line

While this strategy is highly beneficial for short-term traders, it could lead to huge losses compared to traditional funds in fluctuating or seesawing markets. Further, the ETFs’ performance could vary significantly from the actual performance of their underlying index over a longer period when compared to the shorter period (such as weeks or months) due to their compounding effect (see: all the Leveraged Equity ETFs here).

Still, for ETF investors, who are bullish on U.S. equities for the near term, any of the above products could make an interesting choice. Clearly, a near-term long could be intriguing for those with high-risk tolerance and a belief that the “trend is the friend” in this corner of the investing world.

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