The month of December has been kind for the stock market with the major indices enjoying a historic rally despite the surge in coronavirus cases. The vaccine rollout has been the biggest catalyst as it will end the pandemic and set the stage for a speedy recovery thereby boosting demand for several types of products and services in the economy.

A fresh stimulus package of $900 billion added to the strength. The additional spending will help to cushion the economy amid the second round of restrictions put in place by states and local authorities to manage the COVID-19 spread (read: Trump Signs Stimulus Measures: ETF Areas to Gain).

The solid fundamentals 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 the five best-performing leveraged equity ETFs that have piled up handsome gains this month. These funds will continue to be investors’ darlings provided the sentiments remain bullish.

Direxion Daily Small Cap Bull 3x Shares (TNA Quick QuoteTNA - Free Report) – Up 31.7%

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 8.7 million shares a day on average (read: 5 Small-Cap ETFs Set to Explode on COVID-19 Vaccines).

Direxion Daily S&P Biotech Bull 3x Shares (LABU Quick QuoteLABU - Free Report) – Up 31.5%

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 1.1 million shares. The fund has AUM of $422.6 million.

Direxion Daily Regional Banks Bull 3x Shares (DPST Quick QuoteDPST - Free Report) – Up 29.6%

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 $182.2 million in its asset base and trades in an average daily volume of around 492,000 shares.

Direxion Daily Retail Bull 3X Shares (RETL Quick QuoteRETL - Free Report) – Up 27.5%

This ETF offers three times leveraged exposure to the S&P Retail Select Industry Index. The product has amassed about $48.5 million in its asset base, while charging 95 bps in fees per year. Its volume is lower as it exchanges around 10,000 shares a day on average (read: 6 Consumer Discretionary ETFs Riding on Holiday Fervor).

BMO REX MicroSectors FANG+ Index 3X Leveraged ETN – Up 25.5%

This note seeks to offer three times leveraged exposure to the NYSE FANG Index, charging 95 bps in annual fees. The ETN has accumulated $1.2 billion in its asset base and trades in an average daily volume of 498,000 shares.

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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