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ETF News And Commentary

After a bout of volatility in early September, the stock market showed immense strength in the latter part. The key catalysts were the Fed stance, the first presidential debate and a surprise OPEC move.

In particular, the Fed’s dovish stance and increased chances of the Democrat candidate, Hillary Clinton, winning the election in November infused fresh optimism into the stock market. Additionally, the OPEC members unexpectedly agreed to cap its oil production for the first time in eight years last week, restoring confidence in the energy sector. Further, the technology sector has been on a torrid run and has added to the strength (read: OPEC Surprises With Production Cut: Energy ETFs Soar).

Apart from these, the expectation of returning to earnings growth in the fourth quarter and in the next year also stirred up a stock rally.

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 (i.e 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 a friend.

Below, we have highlighted five ETFs that crushed the market in September with abnormal returns piled up in a short period. Moreover, these funds will continue to be investors’ darlings this quarter if global sentiments remain the same.

Direxion Daily S&P Biotech Bull 3x Shares (LABU - ETF report)

Since biotech was on a tear last month, LABU has been a winner in the leveraged space. The fund creates a three times (3x) leveraged long position in the S&P Biotechnology Select Industry Index. It charges an annual fee of 95 bps and trades in huge average daily volume of more than 4 million shares. The fund has accumulated AUM of $198.2 million and surged about 31% last month (read: 5 Top Performing Stocks of the Best ETF of Q3).

Direxion Daily Semiconductor Bull 3x Shares (SOXL - ETF report)

This ETF targets the semiconductor corner of the technology sector with three times leveraged exposure to the PHLX Semiconductor Sector Index. It has amassed about $115 million in its asset base while charges 95 bps in fees per year from investors. Volume is good as it exchanges more than 385,000 shares a day on average. The fund gained 11.8% in September (read: 4 Best ETFs & Stocks to Tap the Tech Boom).

Direxion Daily S&P Oil & Gas Exploration & Production Bull 3x Shares (GUSH - ETF report)

This fund offers triple exposure to the daily performance of the S&P Oil & Gas Exploration & Production Select Industry Index. It has accumulated $89.7 million in its asset base. Average daily volume is solid at around 250,000 shares while expense ratio is 0.95%. The product gained 10.7% last month.

ProShares Ultra Junior Miners ETF (GDJJ - ETF report)

This product provides two times (2x) exposure to the daily performance of the MVIS Global Junior Gold Miners Index. It has been able to manage $10.6 million in its asset base and trades in a paltry volume of under 6,000 shares per day on average. Expense ratio is 0.95%. GDJJ was up 10% in September.

Direxion Daily Energy Bull 3x Shares (ERX - ETF report)

This fund creates a triple (3x or 300%) leveraged long position in the Energy Select Sector Index while charging 95 bps in fees a year. It is a popular and liquid option in the energy leveraged space with AUM of $543 million and average trading volume of 3.6 million shares. The ETF gained 9.2% last month.

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 seesaw markets. Further, their performances 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 Leveraged Equity ETFs here).

Still, for ETF investors who are bullish on equities for the near term, either of the above products could make 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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