After a solid start to October, Wall Street lost momentum heading into November with big losses in the final week of the month. Notably, the three major indices suffered their worst weekly losses since March. The Dow Jones, the S&P 500 and the Nasdaq Composite Index dropped 6.5%, 5.6% and 5.5%, respectively (read: Worried About Dow's Massive Crash? ETF & Stocks to Play).

The plunge followed soaring COVID-19 cases in the United States and Europe as well as renewed lockdown measures that spurred fears of a prolonged economic slowdown. Additionally, concerns over stalled efforts toward further fiscal stimulus measures in Washington and pre-election jitters led to the chaos in the market. Per CBS News, investors lost nearly $1.7 trillion last week as stock markets tumbled. The tech sector declined after big earnings results contributed to the chaos in the stock market.

Against this backdrop, investors rushed to leveraged or inverse leveraged ETFs to increase returns on quick market turns in a short span. These products either create a leveraged long/short position, an inverse long/short position or a leveraged inverse long/short position in the underlying index through the use of swaps, options, future contracts and other financial instruments. Due to their compounding effect, investors can enjoy higher returns in a very short period of time provided the trend remains a friend.

However, these funds run the risk of huge losses compared to traditional funds in fluctuating or seesawing markets. Still, we have highlighted some leveraged/inverse ETFs from different corners that piled up substantial gains in October though these involve a great deal of risk when compared to traditional products. This trend might continue at least in the near term, provided the sentiments remain the same.

Direxion Daily Regional Banks Bull 3x Shares (DPST Quick QuoteDPST - Free Report) – Up 33.7%

Given that the yield curve steepened to the widest since June, banking stocks are flying high. As banks seek to borrow money at short-term rates and lend at long-term rates, a steepening yield curve will earn more on lending and pay less on deposits, thereby leading to a wider spread. This will expand net margins and increase banks’ profits. This fund seeks to deliver three times (3X) the returns of the S&P Regional Banks Select Industry Index, charging 95 bps in fees per year. It has accumulated $98.6 million in its asset base and trades in an average daily volume of around 649,000 shares (read: Bank ETFs Surge as Yield Curve Steepens).

Direxion Daily FTSE China Bull 3X Shares (YINN Quick QuoteYINN - Free Report) – Up 14.7%

China stocks gained last month on fresh policy support and upbeat data that pointed to an economic recovery from the COVID-19-induced weakness. YINN provides three times exposure to the FTSE China 50 Index, which consists of the 50 largest and most-liquid public Chinese companies currently trading on the Hong Kong Stock Exchange. It charges an annual fee of 95 bps and has AUM of $260 million. The fund trades in heavy volume of around 1.8 million shares.

Daily CSI China Internet Index Bull 2X Shares (CWEB Quick QuoteCWEB - Free Report) – Up 12.2%

This fund has been gaining on worldwide acceleration in e-commerce for everything ranging from remote working to entertainment and shopping. It offers twice (2X) the leveraged exposure to China’s Internet market by tracking the CSI Overseas China Internet Index. It charges an annual fee of 94 bps and trades in a moderate average daily volume of about 79,000 shares. The fund has accumulated AUM of $56.1 million (read: Top-Performing Leveraged ETFs of This Year So Far).

ProShares UltraShort FTSE Europe (EPV Quick QuoteEPV - Free Report) – Up 12.2%

The European stock market suffered due to the resurgence in the number of coronavirus cases and the resultant lockdown measures that once again halted economic activities. EPV offers two times the inverse (opposite) of the daily performance of the FTSE Developed Europe All Cap Index. The ETF has AUM of $16.5 million and charges 95 bps in annual fees. It trades in an average daily volume of 11,000 shares.
 
ProShares UltraPro Short Dow30 ETF (SDOW Quick QuoteSDOW - Free Report) – Up 11.5%

Dow Jones shed 4.6% in October, marking the biggest monthly drop since March. This fund provides three times inverse exposure to the Dow Jones Industrial Average. It charges a fee of 95 bps per year and its trading volume is solid, exchanging about 8.5 million shares per day on average. It has amassed $582.4 million in its asset base (read: Are Inverse ETFs Better Bets Till Election Day?).

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 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.

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