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Go Cyclical With These Leveraged ETFs

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The stock market has been hovering around record highs on improving economic conditions. This is easily indicated by the latest bouts of data, which shows that the economy is well recovering and booming. The U.S. GDP grew 6.4% annually in the first quarter, representing the second-strongest increase since 2003 on a rapid pace of vaccination, faster job growth, a new round of stimulus and a reopening economy (read: 5 Top-Ranked ETFs to Ride on a Booming Economy).

The combination has powered activities across all sectors and categories, resulting in increased consumer spending. Americans are spending on big-ticket items such as vacations and weddings, companies are going on hiring sprees, and the transition to new technologies such as electric vehicles is accelerating. Consumer confidence has been on rise and the Conference Board consumer confidence index jumped to the highest level in April since February 2020. Retail sales also surged the most since May 2020 in March.

Additionally, a healing labor market and upbeat earnings with growing earnings estimates for the next quarters bode well for economic growth. Per the IMF projection, the United States will become the engine of global economy this year with the strongest growth in decades. The agency recently upgraded the U.S. economic growth forecast from 5.1% to 6.4% for this year.

Against such a backdrop, economically sensitive sectors are the biggest beneficiaries. Though reflation trade and the resultant increase in rates will weigh on the growth sectors, cyclical sectors like consumer discretionary, industrials, financials and energy will continue to see an uptrend as long as the economy improves. Further, the stocks in this sector are attractively valued at the current levels compared to the technology stocks, whose valuations rose to lofty levels (read: Yellen Triggers Rate Rise Talks: 6 ETFs to Play).

How to Play?

Amid the strong optimism, investors have turned bullish on the cyclical sectors and are seeking to tap this opportunity. For them, a leveraged play on this sector could be an excellent idea as these could see huge gains in a very short time frame compared to the simple products.

While there are several options available in the leveraged space, we have highlighted five that have been soaring this year and have shown huge momentum compared to others:

MicroSectors U.S. Big Oil Index 3X Leveraged ETN (NRGU - Free Report)

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 $502.1 million in its asset base while trading in an average daily volume of 257,000 shares. Expense ratio comes in at 0.95%. NRGU has skyrocketed 161% so far this year.

Direxion Daily Retail Bull 3X Shares (RETL - Free Report)

This ETF offers three times leveraged exposure to the S&P Retail Select Industry Index. The product has amassed about $140.5 million in its asset base, while charging 95 bps in fees per year. It exchanges around 69,000 shares a day on average and has gained 150.2% so far this year (read: March Retail Sales Sparkles: Industry ETFs & Stocks to Win).

Direxion Daily Regional Banks Bull 3x Shares (DPST - Free Report)

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 $502 million in its asset base and trades in an average daily volume of around 294,000 shares. The ETF has climbed 128.2% this year.

Direxion Daily Homebuilders & Supplies Bull 3X Shares (NAIL - Free Report)

NAIL provides leveraged exposure to homebuilders and creates a three times long position in the Dow Jones U.S. Select Home Construction Index. It charges an annual fee of 95 bps and trades in a good average daily volume of about 489,000 shares. The fund has accumulated $512 million in its asset base and has soared 126.5% (read: Homebuilding ETFs Standing Tall Amid Rising Costs).

Direxion Daily Transportation Bull 3X Shares (TPOR - Free Report)

TPOR targets the transportation sector and seeks to deliver three times the daily performance of the Dow Jones Transportation Average Index. The product has AUM of $112.5 million and charges 95 bps in fees and expenses. It trades in lower volumes of about 136,000 shares per day and has gained 92.2%.

Bottom Line

As a caveat, investors should note that these products are extremely volatile and suitable only for short-term traders. Additionally, the daily rebalancing — when combined with leverage — may make these products deviate significantly from the expected long-term performance figures (see: all the Leveraged Equity ETFs here).

Still, for ETF investors who are bullish on the cyclicals for the near term, either of the above products can be an interesting choice. Clearly, a near-term long could be intriguing for those with high-risk tolerance, and a belief that the trend is the friend in this corner of the investing world.

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