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Leveraged ETFs That Are Riding High on a Solid Market Rally

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The market bulls are showing no signs of slowdown. This is especially true as the S&P 500 and the Nasdaq Composite Index have hit a series of new highs while the Dow Jones Industrial is now just a few points away from the record high reached in February.

In fact, the Dow Jones went higher than 29000 for the first time since February. It has been just over a week that the benchmark reclaimed its 28,000 level. The solid run came on optimism surrounding the additional stimulus and a coronavirus vaccine push that has bolstered investors’ confidence in the stock market. In particular, the Trump administration is asking the U.S. states to speed up approval for a potential COVID -19 vaccine distribution by Nov 1, two days ahead of the election (read: Dow Reclaims 28,000: 5 Stocks Driving the ETF Rally).

Additionally, rounds of upbeat data indicate that the American economy is gradually returning to the pre-pandemic level. Further, the Federal Reserve's latest “Beige Book” showed that U.S. businesses saw a modest increase in activity and a rise in employment generally through late August, although some areas of the country saw sluggish growth.

The bullish backdrop for the stocks has resulted in huge demand for leveraged ETFs as investors seek to register big gains in a short span. Leveraged funds provide multiple exposure (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.

Though the rally has been broad-based, technology stocks, stocks tied to the pandemic stay-at-home trends as well as consumer goods and auto stocks are at the forefront of the latest leg of the bull run. Below we highlight leveraged ETFs from these corners that have gained in double digits over the past week. These funds will continue to be investors’ darlings at least in the near term provided the sentiments remain bullish (read: Will Rotation to Cyclical ETFs Continue in September?).

Direxion Daily Semiconductor Bull 3x Shares (SOXL - Free Report) — Up 16.6%

This ETF targets the semiconductor corner of the technology sector with 3X leveraged exposure to the PHLX Semiconductor Sector Index. It has amassed about $1.6 billion in its asset base while charging 93 bps in fees per year. Volume is good as it exchanges 1.1 million shares per day, on average.

Daily Dow Jones Internet Bull 3X Shares (WEBL - Free Report) – Up 13.9%

This fund provides three times leveraged play on the Internet corner of the broad technology sector by tracking the Dow Jones Internet Composite Index. It has attracted $44.2 million in its asset base and charges 95 bps in annual fees. The ETF sees an average daily volume of 91,000 shares.

Direxion Daily Technology Bull 3x Shares (TECL - Free Report) — Up 12.8%

This ETF targets the broad technology sector with three times exposure to the Technology Select Sector Index. It has amassed about $2.3 billion in its asset base and charges 95 bps in fees per year. Volume is good as it exchanges around 434,000 shares a day, on average.

ProShares UltraPro QQQ (TQQQ - Free Report) – Up 11.4%

This ETF provides three times the returns of the daily performance of the Nasdaq-100 Index. It is one of the popular and liquid options in the leveraged large-cap space with AUM of $9 billion and an average daily volume of 30.1 million shares. TQQQ charges 95 bps in fees per year (read: Nasdaq Hits Record Mark 11,000: Can ETFs Rally Further?).

Daily Robotics, Artificial Intelligence & Automation Index Bull 3X Shares (UBOT - Free Report) – Up 11%

This product seeks to deliver three times the daily performance of the Indxx Global Robotics and Artificial Intelligence Thematic Index. It has accumulated $52.1 million in its asset base and trades in an average daily volume of 11,000 shares. The ETF charges 95 bps in annual fees.

BMO REX MicroSectors FANG+ Index 3X Leveraged ETN (FNGU - Free Report) – Up 10.6%

This note seeks to offer three times leveraged exposure to the NYSE FANG Index, charging 95 bps in annual fees. The ETN has accumulated $781.1 million in its asset base and trades in an average daily volume of 540,000 shares.

Daily S&P 500 High Beta Bull 3X Shares (HIBL - Free Report) – Up 10.5%

This ETF offers three times exposure to the performance of the S&P 500 High Beta Index. It has gathered $40.9 million in AUM and trades in an average daily volume of 57,000 shares. The fund charges 95 bps in fees per year from investors.

Direxion Daily Consumer Staples Bull 3X Shares (NEED - Free Report) – Up 10%

This ETF provides three times exposure to the performance of the Consumer Staples Select Sector Index and charges investors 95 bps in annual fees. It has been able to manage $6.3 million in its asset base and trades in an average daily volume of 57,000 shares.

Bottom Line

While this strategy is highly beneficial for short-term traders, it could lead to huge losses compared to the traditional funds in fluctuating or seesawing markets. Further, the funds’ 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).

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