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Wall Street saw a strong start to August, with the tech-heavy Nasdaq Composite Index entering a new bull market. Easing inflation, a drop in Treasury yields and declining commodity prices resulted in risk-on trade. Meme craze added to the strength. However, the rally fizzled in the last couple of weeks, driven by renewed aggressive Fed rate hike speculation that sparked fears of a potential economic recession (read: Meme Frenzy Pushes These ETFs Higher: Will This Continue?).
This has raised the appeal for leveraged and inverse-leveraged ETFs as these fetched outsized returns on quick market turns in a short span. MicroSectors Gold Miners -3X Inverse Leveraged ETN (GDXD - Free Report) , MicroSectors U.S. Big Oil Index 3X Leveraged ETN (NRGU - Free Report) , Direxion Daily Semiconductor Bear 3x Shares (SOXS - Free Report) , ProShares UltraPro Short QQQ (SQQQ - Free Report) and ProShares UltraShort Health Care (RXD - Free Report) gained in double digits and might continue their strong performance if sentiments remain the same.
Jerome Powell, at his Jackson Hole speech, said that the Fed will likely need to keep interest rates high enough to slow down the economy “for some time” in order to curb high inflation. While tight monetary policy "for some time" will bring down inflation from its 40-year high, it means slower growth, a weaker job market and "some pain" for households and businesses.
According to the CME FedWatch tool, nearly half of market participants expect the Fed funds rate to end the year above 3.7%, up from 40% participants a week ago. The Fed raised its benchmark federal funds rate by 0.75 percentage points at each of its last two meetings to a range between 2.25% and 2.5% (read: 5 ETFs Gain as Market Loses Steam in Aug 26 Session).
Additionally, global worries hit investor sentiment. A recent announcement from Russia's Gazprom that it would halt natural gas supplies to Europe for three days at the end of August took a toll on the stock market. High-growth and tech stocks, which were leading the summer rally, were badly beaten again. On the other hand, the energy sector outperformed as oil price rose on the possibility of an OPEC+ output cut and global supply threats due to the unrest in Libya.
However, inflation has moderated and consumer sentiment has improved. The University of Michigan’s preliminary sentiment index rose to a three-month high of 55.1 in August from 51.5 in July.
Leveraged and Inverse-Leveraged ETFs
Leveraged and inverse-leveraged ETFs 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 short period, 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).
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 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.
MicroSectors Gold Miners -3X Inverse Leveraged ETN seeks to offer three times inverse leveraged exposure to the S-Network MicroSectors Gold Miners Index.
MicroSectors Gold Miners -3X Inverse Leveraged ETN has accumulated $21.6 million in its asset base and trades in an average daily volume of 112,000 shares. It charges 95 bps in annual fees.
MicroSectors U.S. Big Oil Index 3X Leveraged ETN (NRGU - Free Report) – Up 19.7%
MicroSectors U.S. Big Oil Index 3X Leveraged ETN provides three times (3X or 300%) 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.
MicroSectors U.S. Big Oil Index 3X Leveraged ETN has been able to manage $1.9 billion in its asset base, while trading in an average daily volume of 169,000 shares. The expense ratio comes in at 0.95%.
Direxion Daily Semiconductor Bear 3x Shares targets the semiconductor corner of the technology sector with three times inverse leveraged exposure to the ICE Semiconductor Index.
Direxion Daily Semiconductor Bear 3x Shares has amassed about $699.2 million in its asset base while charging 95 bps in fees per year. Volume is good as it exchanges 66.7 million shares per day on average.
ProShares UltraPro Short QQQ (SQQQ - Free Report) - Up 11.8%
ProShares UltraPro Short QQQ provides three times inverse exposure to the daily performance of the Nasdaq-100 Index, charging 95 bps in annual fees. The index measures the performance of the 100 largest domestic and international non-financial companies listed on the Nasdaq Stock Market based on market capitalization (read: Summer Rally Ended? Inverse ETFs to Tap).
ProShares UltraPro Short QQQ has AUM of $5 billion and trades in an average daily volume of about 104 million shares.
ProShares UltraShort Health Care (RXD - Free Report) – Up 11%
ProShares UltraShort Health Care offers exposure to two times the inverse of the daily performance of the Dow Jones U.S. Health Care Index.
ProShares UltraShort Health Care has managed assets worth $2.1 million in its asset base and trades in an average daily volume of 15,000 shares. The ETF charges 95 bps in annual fees.
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5 Best Leveraged/Inverse ETFs of August
Wall Street saw a strong start to August, with the tech-heavy Nasdaq Composite Index entering a new bull market. Easing inflation, a drop in Treasury yields and declining commodity prices resulted in risk-on trade. Meme craze added to the strength. However, the rally fizzled in the last couple of weeks, driven by renewed aggressive Fed rate hike speculation that sparked fears of a potential economic recession (read: Meme Frenzy Pushes These ETFs Higher: Will This Continue?).
This has raised the appeal for leveraged and inverse-leveraged ETFs as these fetched outsized returns on quick market turns in a short span. MicroSectors Gold Miners -3X Inverse Leveraged ETN (GDXD - Free Report) , MicroSectors U.S. Big Oil Index 3X Leveraged ETN (NRGU - Free Report) , Direxion Daily Semiconductor Bear 3x Shares (SOXS - Free Report) , ProShares UltraPro Short QQQ (SQQQ - Free Report) and ProShares UltraShort Health Care (RXD - Free Report) gained in double digits and might continue their strong performance if sentiments remain the same.
Jerome Powell, at his Jackson Hole speech, said that the Fed will likely need to keep interest rates high enough to slow down the economy “for some time” in order to curb high inflation. While tight monetary policy "for some time" will bring down inflation from its 40-year high, it means slower growth, a weaker job market and "some pain" for households and businesses.
According to the CME FedWatch tool, nearly half of market participants expect the Fed funds rate to end the year above 3.7%, up from 40% participants a week ago. The Fed raised its benchmark federal funds rate by 0.75 percentage points at each of its last two meetings to a range between 2.25% and 2.5% (read: 5 ETFs Gain as Market Loses Steam in Aug 26 Session).
Additionally, global worries hit investor sentiment. A recent announcement from Russia's Gazprom that it would halt natural gas supplies to Europe for three days at the end of August took a toll on the stock market. High-growth and tech stocks, which were leading the summer rally, were badly beaten again. On the other hand, the energy sector outperformed as oil price rose on the possibility of an OPEC+ output cut and global supply threats due to the unrest in Libya.
However, inflation has moderated and consumer sentiment has improved. The University of Michigan’s preliminary sentiment index rose to a three-month high of 55.1 in August from 51.5 in July.
Leveraged and Inverse-Leveraged ETFs
Leveraged and inverse-leveraged ETFs 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 short period, 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).
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 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.
MicroSectors Gold Miners -3X Inverse Leveraged ETN (GDXD - Free Report) – Up 26.6%
MicroSectors Gold Miners -3X Inverse Leveraged ETN seeks to offer three times inverse leveraged exposure to the S-Network MicroSectors Gold Miners Index.
MicroSectors Gold Miners -3X Inverse Leveraged ETN has accumulated $21.6 million in its asset base and trades in an average daily volume of 112,000 shares. It charges 95 bps in annual fees.
MicroSectors U.S. Big Oil Index 3X Leveraged ETN (NRGU - Free Report) – Up 19.7%
MicroSectors U.S. Big Oil Index 3X Leveraged ETN provides three times (3X or 300%) 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.
MicroSectors U.S. Big Oil Index 3X Leveraged ETN has been able to manage $1.9 billion in its asset base, while trading in an average daily volume of 169,000 shares. The expense ratio comes in at 0.95%.
Direxion Daily Semiconductor Bear 3x Shares (SOXS - Free Report) – Up 19.5%
Direxion Daily Semiconductor Bear 3x Shares targets the semiconductor corner of the technology sector with three times inverse leveraged exposure to the ICE Semiconductor Index.
Direxion Daily Semiconductor Bear 3x Shares has amassed about $699.2 million in its asset base while charging 95 bps in fees per year. Volume is good as it exchanges 66.7 million shares per day on average.
ProShares UltraPro Short QQQ (SQQQ - Free Report) - Up 11.8%
ProShares UltraPro Short QQQ provides three times inverse exposure to the daily performance of the Nasdaq-100 Index, charging 95 bps in annual fees. The index measures the performance of the 100 largest domestic and international non-financial companies listed on the Nasdaq Stock Market based on market capitalization (read: Summer Rally Ended? Inverse ETFs to Tap).
ProShares UltraPro Short QQQ has AUM of $5 billion and trades in an average daily volume of about 104 million shares.
ProShares UltraShort Health Care (RXD - Free Report) – Up 11%
ProShares UltraShort Health Care offers exposure to two times the inverse of the daily performance of the Dow Jones U.S. Health Care Index.
ProShares UltraShort Health Care has managed assets worth $2.1 million in its asset base and trades in an average daily volume of 15,000 shares. The ETF charges 95 bps in annual fees.