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5 Best-Performing Leveraged ETFs of Fourth Quarter

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After a brutal start to the final quarter of 2020, Wall Street staged a solid comeback with the major indices soaring to historic highs primarily on vaccine development.   

Coronavirus immunizations have started in America with Pfizer (PFE - Free Report) shots and more vaccines are on the way. Moderna (MRNA - Free Report) , last week, received the FDA authorization for emergency use against COVID-19 in individuals 18 years of age or older. A vaccine will lead to a swift recovery in the economy, which was battered by the pandemic (read: Sector ETFs to Gain the Most on COVID-19 Vaccine Rollout).

Additionally, the potential of a divided Congress with president-elect Biden is driving the stocks higher. The divided government is favorable for the economy, as there will be lesser chances of major tax increases and tighter regulations. Further, a new coronavirus relief package worth $900 billion approved by the Congress has added to the strength.

The rally came despite the soaring number of coronavirus cases. Per New York Times report, daily average new COVID-19 cases surged to 216,163 over the past week, 7% higher than the average recorded two-weeks ago.

The strong optimism over the economic recovery has 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 ETFs that gained more than 85% over the past three months. These funds will continue to be investors’ darlings provided the sentiments remain bullish.

Direxion Daily S&P Biotech Bull 3x Shares (LABU - Free Report) – Up 107.5%

This fund creates a three times leveraged long position on the S&P Biotechnology Select Industry Index. It charges an annual fee of 0.95% and trades in a heavy average daily volume of about 1.2 million shares. The fund has AUM of $395.8 million (read: ETFs to Tap AstraZeneca Mega-Deal to Buy Alexion).

Direxion Daily Regional Banks Bull 3x Shares (DPST - Free Report) – Up 95.9%

This fund seeks to deliver three times the returns of the S&P Regional Banks Select Industry Index, charging 95 bps in fees per year. It has accumulated $181.4 million in its asset base and trades in an average daily volume of around 528,000 shares

Direxion Daily Semiconductor Bull 3x Shares (SOXL - Free Report) — Up 87.5%

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 $2.1 billion in its asset base while charging 93 bps in fees per year. Volume is good as it exchanges 736,000 shares per day, on average.

Direxion Daily Small Cap Bull 3x Shares (TNA - Free Report) – Up 86.1%

This product provides a triple leveraged play to the small-cap Russell 2000 Index, charging 95 bps in fees and expenses. It has amassed $1.6 billion in its asset base and sees solid volume of 8.9 million shares a day on average (read: 5 Small-Cap ETFs Set to Explode on COVID-19 Vaccines).

Daily S&P 500 High Beta Bull 3X Shares (HIBL - Free Report) – Up 85.3%

This ETF offers three times exposure to the performance of the S&P 500 High Beta Index. It has gathered $67.3 million in its asset base and trades in an average daily volume of 37,000 shares. The fund charges 95 bps in fees per year from its investors.

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: all the Leveraged Equity ETFs here).

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