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Wall Street saw wild swings last month. While earnings optimism and a rebounding economy pushed the three major indices to new highs in July, concerns about the spread of the Delta variant of COVID-19 made investors jittery. With this, the S&P 500 logged its sixth consecutive month of gain, rising 2.3%. The Dow Jones and the Nasdaq Composite Index gained 1.3% and 1.2%, respectively.
In particular, total earnings for 59.3% of the S&P 500 total membership that have reported so far are up 102% from the same period last year on 26.8% higher revenues, with 89.2% beating EPS estimates and a record 87.5% beating revenue estimates. Combining the results that have come up with estimates for the still-to-come companies, total earnings for the S&P 500 Index are expected to be up 88.3% from the same period last year on 22.2% higher revenues. This would follow 49.9% earnings growth on 10.3% higher revenues in Q1 of 2021 (read: 5 Hot Equity ETFs of Last Week to Sizzle on Solid Earnings).
However, the rally in the stocks was not broad-based with shares of defensive sectors like utilities and real estate being the biggest winners. This has resulted in higher demand for leveraged and inverse-leveraged ETFs as these could fetch outsized returns on quick market turns in a short span.
These products either create a leveraged long/short position, an inverse long/short position or a leveraged inverse long/short position in the underlying index through the use of swaps, options, future contracts and other financial instruments. Due to their compounding effect, investors can enjoy higher returns in a very short period of time provided the trend remains a friend. However, these funds run the risk of huge losses compared to traditional funds in fluctuating or seesawing markets. Further, their performance could vary significantly from the actual performance of their underlying index over a longer period when compared to a shorter period (such as, weeks or months).
We have highlighted some leveraged/inverse products that gained in double digits last month though these involve a great deal of risk when compared with the traditional products. This trend might continue at least for the near term if the sentiments remain the same.
MicroSectors U.S. Big Oil Index -3X Inverse Leveraged ETN (NRGD - Free Report) – Up 39.3%
NRGD offers three times inverse exposure to the Solactive MicroSectors U.S. Big Oil Index. The ETN has accumulated $22.1 million in its asset base. It charges 95 bps in annual fees and trades in an average daily volume of about 349,000 shares.
This product seeks to deliver three times the inverse daily performance of the S&P Biotechnology Select Industry Index. The fund has amassed $47.4 million in its asset base and has an average daily volume of more than 2.5 million shares. It charges investors 95 bps in annual fees and expenses.
Direxion Daily MSCI Real Estate Bull 3X Shares (DRN - Free Report) — Up 11.2%
This product seeks to deliver three times the performance of the MSCI US IMI Real Estate 25/50 Index. It has an AUM of $169.2 million and an average daily volume of around 467,000 shares. The ETF charges 95 bps in annual fees (read: Why Real Estate ETFs Could be Tapped Now).
With AUM of $23.8 million, this fund offers three times exposure to the performance of the Utilities Select Sector Index. It charges investors an annual fee of 95 bps and trades in a lower average daily volume of 57,000 shares.
This fund creates three times leveraged long position in the Health Care Select Sector Index while charging 95 bps in fees a year. It has $202.3 million in AUM and trades in volumes of 50,000 shares on average.
Bottom Line
Investors should note that these products are suitable only for short-term traders as these are rebalanced on a daily basis. Further, liquidity can be a big problem as it can make the products more expensive than what they appear (see: all the Inverse Equity ETFs here).
Still, ETF investors seeking to tap abrupt movements can go long or short in the near term.
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5 Top-Performing Leveraged/Inverse ETFs of July
Wall Street saw wild swings last month. While earnings optimism and a rebounding economy pushed the three major indices to new highs in July, concerns about the spread of the Delta variant of COVID-19 made investors jittery. With this, the S&P 500 logged its sixth consecutive month of gain, rising 2.3%. The Dow Jones and the Nasdaq Composite Index gained 1.3% and 1.2%, respectively.
In particular, total earnings for 59.3% of the S&P 500 total membership that have reported so far are up 102% from the same period last year on 26.8% higher revenues, with 89.2% beating EPS estimates and a record 87.5% beating revenue estimates. Combining the results that have come up with estimates for the still-to-come companies, total earnings for the S&P 500 Index are expected to be up 88.3% from the same period last year on 22.2% higher revenues. This would follow 49.9% earnings growth on 10.3% higher revenues in Q1 of 2021 (read: 5 Hot Equity ETFs of Last Week to Sizzle on Solid Earnings).
However, the rally in the stocks was not broad-based with shares of defensive sectors like utilities and real estate being the biggest winners. This has resulted in higher demand for leveraged and inverse-leveraged ETFs as these could fetch outsized returns on quick market turns in a short span.
These products either create a leveraged long/short position, an inverse long/short position or a leveraged inverse long/short position in the underlying index through the use of swaps, options, future contracts and other financial instruments. Due to their compounding effect, investors can enjoy higher returns in a very short period of time provided the trend remains a friend. However, these funds run the risk of huge losses compared to traditional funds in fluctuating or seesawing markets. Further, their performance could vary significantly from the actual performance of their underlying index over a longer period when compared to a shorter period (such as, weeks or months).
We have highlighted some leveraged/inverse products that gained in double digits last month though these involve a great deal of risk when compared with the traditional products. This trend might continue at least for the near term if the sentiments remain the same.
MicroSectors U.S. Big Oil Index -3X Inverse Leveraged ETN (NRGD - Free Report) – Up 39.3%
NRGD offers three times inverse exposure to the Solactive MicroSectors U.S. Big Oil Index. The ETN has accumulated $22.1 million in its asset base. It charges 95 bps in annual fees and trades in an average daily volume of about 349,000 shares.
Direxion Daily S&P Biotech Bear 3x Shares (LABD - Free Report) – Up 30.6%
This product seeks to deliver three times the inverse daily performance of the S&P Biotechnology Select Industry Index. The fund has amassed $47.4 million in its asset base and has an average daily volume of more than 2.5 million shares. It charges investors 95 bps in annual fees and expenses.
Direxion Daily MSCI Real Estate Bull 3X Shares (DRN - Free Report) — Up 11.2%
This product seeks to deliver three times the performance of the MSCI US IMI Real Estate 25/50 Index. It has an AUM of $169.2 million and an average daily volume of around 467,000 shares. The ETF charges 95 bps in annual fees (read: Why Real Estate ETFs Could be Tapped Now).
Direxion Daily Utilities Bull 3X Shares (UTSL - Free Report) – Up 11.9%
With AUM of $23.8 million, this fund offers three times exposure to the performance of the Utilities Select Sector Index. It charges investors an annual fee of 95 bps and trades in a lower average daily volume of 57,000 shares.
Direxion Daily Healthcare Bull 3X Shares (CURE - Free Report) – Up 11.7%
This fund creates three times leveraged long position in the Health Care Select Sector Index while charging 95 bps in fees a year. It has $202.3 million in AUM and trades in volumes of 50,000 shares on average.
Bottom Line
Investors should note that these products are suitable only for short-term traders as these are rebalanced on a daily basis. Further, liquidity can be a big problem as it can make the products more expensive than what they appear (see: all the Inverse Equity ETFs here).
Still, ETF investors seeking to tap abrupt movements can go long or short in the near term.