November was the banner month for the U.S. stock market buoyed primarily by vaccine development, which has regained investors’ confidence. A vaccine will lead to a swift recovery in the economy, which was battered by the pandemic.
The potential for a divided Congress with president-elect Biden and better-than-expected earnings added to the strength. The divided government is favorable for the economy with lesser chances of major tax increases and tighter regulations, and improving prospects for a smooth transition of Biden to the White House. The rally came despite the soaring number of coronavirus cases. Per the latest report, COVID-19 cases in the United States topped 4 million in November alone, more than doubling the one-month record of 1.9 million from just a month earlier. Notably, the Dow Jones Industrial Average logged its best month since January 1987, jumping about 12%. The blue chip index topped the 30,000 milestone for the first time. Meanwhile, the S&P 500 and the Nasdaq Composite Index enjoyed their best month since April (read: Dow Tops 30,000: 5 Stocks Driving the ETF). The solid fundamentals and a soaring stock market have resulted in huge demand for the 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. Below we highlight some leveraged equity ETFs that gained more than 60% last month. These funds will continue to be investors’ darlings provided the sentiments remain bullish. MicroSectors U.S. Big Oil Index 3X Leveraged ETN ( NRGU Quick Quote NRGU - Free Report) – Up 91% This ETN provides three times leveraged exposure to the Solactive MicroSectors U.S. Big Oil Index, which is equal-dollar weighted and provides exposure to the 10 largest U.S. energy and oil companies. It has been able to manage $248.2 million in its asset base while trades in an average daily volume of 323,000 shares. Expense ratio comes in at 0.95% (read: 5 Sector ETFs That Beat the Market in November). Daily S&P 500 High Beta Bull 3X Shares ( HIBL Quick Quote HIBL - Free Report) – Up 70% This ETF offers three times exposure to the performance of the S&P 500 High Beta Index. It has gathered $53.8 million in its asset base and trades in an average daily volume of 39,000 shares. The fund charges 98 bps in fees per year from its investors. Direxion Daily Retail Bull 3X Shares ( RETL Quick Quote RETL - Free Report) – Up 64.4% This ETF offers three times leveraged exposure to the S&P Retail Select Industry Index. The product has amassed about $39.8 million in its asset base, while charging 95 bps in fees per year. Its volume is lower as it exchanges around 12,000 shares a day on average. Direxion Daily Aerospace & Defense Bull 3X Shares ( DFEN Quick Quote DFEN - Free Report) — Up 63.8% The fund creates three times leveraged long position in the Dow Jones U.S. Select Aerospace & Defense Index. It charges an annual fee of 95 bps and trades in a good average daily volume of about 4 million shares. The fund has accumulated AUM of $317.6 million. MicroSectors U.S. Big Banks Index 3X Leveraged ETN ( BNKU Quick Quote BNKU - Free Report) – Up 61.5% BNKU seeks to offer three times exposure to the Solactive MicroSectors U.S. Big Banks Index. The ETN has accumulated $32.9 million in its asset base. It charges 95 bps in annual fees and trades in an average daily volume of about 89,000 shares (read: Cyclical Sector Outperforming: 6 Cheap ETFs to Track). Direxion Daily S&P Biotech Bull 3x Shares ( LABU Quick Quote LABU - Free Report) – Up 60.8% This fund creates a three times leveraged long position on the S&P Biotechnology Select Industry Index. It charges an annual fee of 1.04% and trades in heavy average daily volume of about 1.4 million shares. The fund has AUM of $279.6 million. Direxion Daily Semiconductor Bull 3x Shares ( SOXL Quick Quote SOXL - Free Report) — Up 60.5% This ETF targets the semiconductor corner of the technology sector with three times leveraged exposure to the PHLX Semiconductor Sector Index. It has amassed about $1.7 billion in its asset base while charging 96 bps in fees per year. Volume is good as it exchanges 857,000 shares per day, on average. 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 (see:
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