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5 Best Performing Leveraged ETFs of Q3

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Despite September’s losses, the third quarter is going strong for the Wall Street. Unprecedented fiscal and monetary stimulus, hopes of a swift economic rebound, positive development in the progress of coronavirus vaccine, rise in mergers and acquisitions, and better-than-expected earnings is driving the quarter. 

Notably, the S&P 500 and the Nasdaq Composite Index are on course for their best two-quarter winning streaks since 2009 and 2000, respectively (read: 3 Top Sectors of Q3 & Their Top ETFs).
 
The concerns over lofty valuation and lack of additional fiscal stimulus package from Washington have been weighing on the markets in recent weeks. After fourth straight week of losses, stocks have become attractive for investors looking for a bargain hunt. Additionally, House Speaker Nancy Pelosi over the weekend indicated that a long-stalled last-minute stimulus measure might come before November elections. Renewed hopes for further stimulus coupled with bouts of upbeat economic data lifted investors’ sentiment.  

This has resulted in 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 (read: 5 ETFs Shining Bright Amid September Selling).

Below we highlight some leveraged equity ETFs from different corners of the market that piled up more than 40% gains in the third quarter. These funds will continue to be investors’ darlings provided the sentiments remain bullish.

BMO REX MicroSectors FANG+ Index 3X Leveraged ETN (FNGU - Free Report) – Up 84%

This note seeks to offer three times leveraged exposure to the NYSE FANG Index, charging 95 basis points (bps) in annual fees. The ETN has accumulated $729.1 million in its asset base and trades in average daily volume of 571,000 shares.

Direxion Daily Transportation Bull 3X Shares (TPOR - Free Report) – Up 81.9%

TPOR targets the transportation sector and seeks to deliver thrice the daily performance of the Dow Jones Transportation Average. The product has AUM of $40.5 million and charges 95 bps in fees and expenses. It trades in lower volumes of about 233,000 shares per day.

Direxion Daily Homebuilders & Supplies Bull 3X Shares (NAIL - Free Report) — Up 71.6%

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 1.7 million shares. The fund has accumulated $394.1 million in its asset base (read: ETFs to Gain as U.S. New Home Sales Hit 14-Year High).

Direxion Daily Retail Bull 3X Shares (RETL - Free Report) – Up 42.4%

This ETF offers three times leveraged exposure to the S&P Retail Select Industry Index. The product has amassed about $32.1 million in its asset base, while charging 95 bps in fees per year. Its volume is lower as it exchanges around 19,000 shares a day on average.

Daily Robotics, Artificial Intelligence & Automation Index Bull 3X Shares (UBOT - Free Report) – Up 40.7%

This product seeks to deliver three times the daily performance of the Indxx Global Robotics and Artificial Intelligence Thematic Index. It has accumulated $49.5 million in its asset base and trades in an average daily volume of 17,000 shares. The ETF charges 95 bps in annual fees.

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 compared with 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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