The U.S. stock market is on track to post big first-half gains. A mega-cap tech stocks’ surge, a better-than-expected earnings season and hopes that the Fed is nearing the end of its rate-hiking cycle have boosted investors’ confidence amid slowdown concerns and the banking crisis. Additionally, bouts of solid data indicate a still strong economy.
With just a couple of trading days left, the Nasdaq Composite Index is on pace for the best first-half performance since 1983, gaining 30%. Meanwhile, the S&P 500 jumped 14% and is heading toward the best first-half performance since 2021. This has resulted in huge demand for leveraged ETFs as investors seek to register big gains in a short span (read: S&P 500 ETF Enters Bull Market: 5 Best Stocks YTD). We highlight a bunch of the best-performing leveraged equity ETFs from different corners of the market that are leaders in their respective segments. These include GraniteShares 1.5x Long NVDA Daily ETF ( NVDL Quick Quote NVDL - Free Report) , Direxion Daily Semiconductor Bull 3x Shares ( SOXL Quick Quote SOXL - Free Report) , Direxion Daily Homebuilders & Supplies Bull 3X Shares ( NAIL Quick Quote NAIL - Free Report) , ProShares UltraPro QQQ ( TQQQ Quick Quote TQQQ - Free Report) and MicroSectors Travel 3x Leveraged ETN ( FLYU Quick Quote FLYU - Free Report) . These funds will continue to be investors’ darlings, at least in the near term, provided the sentiments remain bullish. Most of the rally has been powered by mega-cap technology stocks, which have been seen as safe-haven trade amid volatility in the banking sector. Then, strong corporate earnings and the craze around artificial intelligence led to a spike in tech shares. Leveraged ETFs
Leveraged ETFs provide multiple exposures (2X or 3X) to the daily performance of the underlying index. These funds employ various investment strategies, such as the use of swaps, futures contracts and other derivative instruments to accomplish their objectives. Due to their compounding effect, investors can enjoy higher returns in a very short period of time, provided the trend remains a friend (see:
all Leveraged Equity ETFs here). Since most of these ETFs seek to attain their goals on a daily basis, their performance could vary significantly from the performance of their underlying index or benchmark over a longer period when compared to a shorter period (such as weeks, months or years) due to their compounding effect. Investors should also note that leveraged ETFs involve a great deal of risk when compared to the traditional funds. They are often more costly and can be less tax-efficient, as they can see capital gains through the use of swaps and other derivative instruments. GraniteShares 1.5x Long NVDA Daily ETF ( NVDL Quick Quote NVDL - Free Report) – Up 331.9% GraniteShares 1.5x Long NVDA Daily ETF magnifies exposure to a single trade, seeking 1.5 times (150%) the daily percentage change of the common stock of NVIDIA. It has an expense ratio of 1.15% and trades in a volume of 180,000 shares a day on average. GraniteShares 1.5x Long NVDA Daily ETF has amassed $93.6 million in its asset base (read: Nvidia Hits Trillion-Dollar Market Cap: 5 ETFs to Track). Direxion Daily Semiconductor Bull 3x Shares ( SOXL Quick Quote SOXL - Free Report) – Up 146% Direxion Daily Semiconductor Bull 3x Shares targets the semiconductor corner of the technology sector with three times leveraged exposure to the ICE Semiconductor Index. Direxion Daily Semiconductor Bull 3x Shares has amassed about $6.2 billion in its asset base, while charging 89 bps in fees per year. Volume is good as it exchanges 59 million shares per day on average. Direxion Daily Homebuilders & Supplies Bull 3X Shares ( NAIL Quick Quote NAIL - Free Report) - Up 97.8% Direxion Daily Homebuilders & Supplies Bull 3X Shares provides leveraged exposure to homebuilders. It creates a three-times-long position in the Dow Jones U.S. Select Home Construction Index, charging an annual fee of 93 bps. Direxion Daily Homebuilders & Supplies Bull 3X Shares trades in a good average daily volume of about 213,000 shares and has accumulated $232.4 million in its asset base. ProShares UltraPro QQQ ( TQQQ Quick Quote TQQQ - Free Report) – Up 130.3% ProShares UltraPro QQQ offers three times the leveraged exposure to the NASDAQ-100 Index. It has amassed $17 billion in AUM and trades in a heavy volume of 103 million shares, on average. It charges 86 bps in annual fees. MicroSectors Travel 3x Leveraged ETN ( FLYU Quick Quote FLYU - Free Report) – Up 104.5% MicroSectors Travel 3x Leveraged ETN offers three times exposure to the performance of the MerQube MicroSectors U.S. Travel Index. It has accumulated $6 million in its asset base since its debut in late June last year and charges 95 bps in annual fees. MicroSectors Travel 3x Leveraged ETN trades in a paltry volume of 4,000 shares per day, on average. Will The Trend Continue?
Historical data suggests that when the S&P 500 finishes the first half of the year more than 10% higher, the median return for the second half is usually positive. In fact, in the 22 instances since 1950 when this happened, the median return for the second half of the year is 8%, with an 82% win ratio. If the S&P 500 ended negative in the previous year but recorded a more than 10% gain in the first half of the following year, the median return for the second half is even higher at 12% with an 89% win ratio.
If we look into the macro trends, the U.S. stock market is currently facing a number of headwinds, including global growth slowdown, trade tensions, the ongoing regulatory scrutiny of big tech and the ongoing war in Ukraine. According to the World Bank, 2023 is likely to be one of the slowest growth years for advanced economies in the last five decades, as two-thirds of developing economies will see lower growth than in 2022. After a pause in rate hike in the latest meeting, the Fed has signaled more interest rate increases this year. According to Powell, "Inflation pressures continue to run high, and the process of getting inflation back down to 2% has a long way to go." Officials indicated there could be two more quarter-percentage-point increases this year. The Fed’s benchmark borrowing rate is currently pegged in a range of 5-5.25% (read: Fed to Hike Rates Further: ETFs to Buy).