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5 Best Leveraged ETFs of February

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The stock markets across the globe saw wild swings last month due to fears of higher inflation that prompted a sell-off in government bonds and spread anxiety across financial markets (read: Yields Head for Big Monthly Gain: ETFs to Win & Lose).

However, renewed optimism over speedy economic recovery from the pandemic-driven recession kept the bullish run intact. This is especially true given hopes of further U.S. stimulus package, signs of a healing labor market, continued progress in more vaccines, rapid vaccination rollout and better-than-expected earnings.

The combination of factors will result in increased industrial and manufacturing activity as well as a pickup in consumer demand. In particular, U.S. consumer spending rose the most in seven months in January, indicating that the economy is growing faster than expected.

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 (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 five best performing leveraged equity ETFs from different corners of the market that piled up more than 30% gains 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 - Free Report) – Up 94.6%

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 $481.6 million in its asset base while trading in an average daily volume of 382,000 shares. Expense ratio comes in at 0.95% (read: Cold Blast Wrecks Havoc in U.S.: ETFs to Win & Lose).

Direxion Daily Regional Banks Bull 3x Shares (DPST - Free Report) – Up 62%

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 $389.6 million in its asset base and trades in an average daily volume of around 315,000 shares (read: Here's Why You Should Buy Bank ETFs Now).

Daily S&P 500 High Beta Bull 3X Shares (HIBL - Free Report) – Up 62%

This ETF offers three times exposure to the performance of the S&P 500 High Beta Index. It has gathered $88.4 million in its asset base and trades in an average daily volume of 25,000 shares. The fund charges 95 bps in fees per year from its investors.

Direxion Daily S&P Oil & Gas Exploration & Production Bull 2x Shares (GUSH - Free Report) – Up 53.9%

This fund offers two times exposure to the daily performance of the S&P Oil & Gas Exploration & Production Select Industry Index. It has accumulated $786.8 million in its asset base and has a solid average daily volume of around 2.5 million shares. The expense ratio comes in at 0.95%.

Direxion Daily Transportation Bull 3X Shares (TPOR - Free Report) – Up 34.2%

TPOR targets the transportation sector and seeks to deliver three times the daily performance of the Dow Jones Transportation Average. The product has AUM of $52 million and charges 95 bps in fees and expenses. It trades in lower volumes of about 85,000 shares per day (read: 5 ETFs to Ride On the Rotation to Cyclical Sectors).

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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