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S&P 500 On A Bull Run: Bet on Leveraged ETFs for 2017
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Braving all economic and political challenges, the S&P 500 has been on a torrid run this year, especially in the second half. In fact, market sentiments have turned extremely bullish after the election when pro-growth economic policies by President-elect Trump triggered risk-on trade and sent the major indices to new peaks several times.
Notably, the S&P 500 has risen 10.7% from a year-to-date look, with half of the gains coming after election on November 8.
Trump has promised to accelerate economic growth, spend big time on infrastructure, reduce regulations, cut taxes and create more jobs in the country that will likely flood companies with excess cash and earnings growth. It will also lead to a wave of buybacks, and mergers and acquisitions.
Additionally, the Fed’s second lift-off in a decade and its hawkish stance for 2017 infused optimism into the market (read: How to Profit from Rising Rates with ETFs).
Solid U.S. Economy
The job market remains the most progressive area with the longest streak of overall job growth since the financial crisis and unemployment rate dropping to a nine-year low of 4.6%. The U.S. economy continued its strong momentum early in the fourth quarter after growing at its quickest pace in two years in the third quarter. Strong consumer spending, rising confidence and rising inflation added to the strength.
This is especially true given that consumer spending, which accounts for more than two-thirds of U.S. economic activity, accelerated at a solid pace for the second consecutive month in October. Additionally, recent consumer sentiment surveys were extremely positive as consumer confidence rose to the highest level since July 2007 in November as per the report from the New York-based Conference Board. According to the University of Michigan, consumer sentiment in early December rose to the highest level since January 2015 (read: 5 Top-Ranked Consumer Discretionary ETFs to Buy Now).
Bullish Signals
According to data provider Trade Alert, the bullish contrast on the S&P 500 smashed records with more than 1 million calls traded on December 8, topping the prior all-time high set on December 7. It was the first time since 2014 that two records on call volume were set in one week. Open interest, or total exposure, in bullish options to the index also hovered near the one-year high.
Several market researchers and analysts are also positive on the index heading into the New Year. This is especially true given that 14 strategists expect the S&P 500 index to climb to a range of 2,300 and 2,500 in 2017. A few analysts like Bank of America and Credit Suisse see the index in the lower range while RBC Capital Markets expect the S&P 500 to be near 2,500. Additionally, CNBC's Market Strategist Survey foresees price target of 2,325 the S&P 500.
Avi Gilburt also has a ‘strong bullish’ stance assuming that the S&P 500 will remain over the 2,205–2,220 support region. It expects the index to range between 2,537 and 2,611 in 2017. According to the Global Equity Strategy Report, the S&P 500 will likely move up in the mid-single-digit range in 2017.
Adding to the strong bull signal is that wealthy Americans are moving back to the stock market on Trump-induced optimism. A large percentage of millionaires think that the S&P 500 will go up by 5–10% in 2017 and 60% are of the opinion that Trump will be good for stock investing (read: 4 Under-the-Radar ETFs Soaring High After Trump Win).
Positive Historical Trends
The stock market has a tendency to move up during the six-month period (November–April) buoyed by seasonal tailwinds such as mutual fund manager window dressing, pension funds capital influx, investment of year-end bonuses, and funding of individual retirement accounts (IRAs). As per the Stock Trader's Almanac, the S&P 500 index gained an average 7.1% during this six-month period compared to 1.4% from May through October.
How to Play?
Given this, the S&P 500 will likely see solid trading ahead and investors could easily tap this opportune moment by going long on the index. There are a number of leveraged inverse products in the market that offer multiple (2x or 3x) exposure to the index. Below we highlight those and some of the key differences between each:
This is the most popular and liquid ETF in the leveraged space with AUM of over $1.7 billion. The fund seeks to deliver twice the return of the index, charging investors 0.89% in expense ratio. It trades in a solid average daily volume of around 3 million shares.
Direxion Daily S&P 500 Bull 1.25x Shares
This ETF offers 125% exposure to the S&P 500 Index and is the cheapest choice in the large-cap leveraged space, charging just 35 bps in annual fees. It has accumulated $7.2 million in its asset base while trades in a smaller volume of 2000 shares a day on average.
This product also provides two times (2x) exposure to the index, charging a lower fee of 60 bps. It has $5.4 million in AUM and sees lower volume of about 3,000 shares a day on average.
Investors having a more bullish view and higher risk appetite could find UPRO interesting as the fund provides three times (3x) exposure to the index. Though the ETF charges slightly higher fee of 94 bps per year, trading volume is solid. The product exchanges about 2.4 million shares per day on average. It has amassed $718.3 million in its asset base so far.
This fund also creates a triple leveraged long position in the S&P 500 Index while charging 95 bps in fees a year. It has $534 million in AUM and trades in volume of 2 million shares on average.
Barclays iPath Long Extended S&P 500 TR Index ETN
This is an ETN option providing triple leveraged long position in the index. It charges 35 bps in annual fees and is an unpopular an illiquid option with AUM of $2.3 million and average daily volume of under 1,000 shares (read: ETFs Vs. ETNs: What Investors Need to Know).
UBS ETRACS Monthly Reset 2xLeveraged S&P 500 Total Return ETN
This ETN is linked to the monthly compounded 2x leveraged performance of the S&P 500 Total Return Index. It has AUM of $38.2 million and trades in light volume of under 1,000 shares a day. Expense ratio comes in at 0.85%.
Bottom Line
As a caveat, investors should note that such products are suitable only for short-term traders as these are rebalanced on a daily basis (see: all the Leveraged Equity ETFs here).
Still, for ETF investors who are bullish on the equity market 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 your friend” in this corner of the investing world.
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S&P 500 On A Bull Run: Bet on Leveraged ETFs for 2017
Braving all economic and political challenges, the S&P 500 has been on a torrid run this year, especially in the second half. In fact, market sentiments have turned extremely bullish after the election when pro-growth economic policies by President-elect Trump triggered risk-on trade and sent the major indices to new peaks several times.
Notably, the S&P 500 has risen 10.7% from a year-to-date look, with half of the gains coming after election on November 8.
Trump has promised to accelerate economic growth, spend big time on infrastructure, reduce regulations, cut taxes and create more jobs in the country that will likely flood companies with excess cash and earnings growth. It will also lead to a wave of buybacks, and mergers and acquisitions.
Additionally, the Fed’s second lift-off in a decade and its hawkish stance for 2017 infused optimism into the market (read: How to Profit from Rising Rates with ETFs).
Solid U.S. Economy
The job market remains the most progressive area with the longest streak of overall job growth since the financial crisis and unemployment rate dropping to a nine-year low of 4.6%. The U.S. economy continued its strong momentum early in the fourth quarter after growing at its quickest pace in two years in the third quarter. Strong consumer spending, rising confidence and rising inflation added to the strength.
This is especially true given that consumer spending, which accounts for more than two-thirds of U.S. economic activity, accelerated at a solid pace for the second consecutive month in October. Additionally, recent consumer sentiment surveys were extremely positive as consumer confidence rose to the highest level since July 2007 in November as per the report from the New York-based Conference Board. According to the University of Michigan, consumer sentiment in early December rose to the highest level since January 2015 (read: 5 Top-Ranked Consumer Discretionary ETFs to Buy Now).
Bullish Signals
According to data provider Trade Alert, the bullish contrast on the S&P 500 smashed records with more than 1 million calls traded on December 8, topping the prior all-time high set on December 7. It was the first time since 2014 that two records on call volume were set in one week. Open interest, or total exposure, in bullish options to the index also hovered near the one-year high.
Several market researchers and analysts are also positive on the index heading into the New Year. This is especially true given that 14 strategists expect the S&P 500 index to climb to a range of 2,300 and 2,500 in 2017. A few analysts like Bank of America and Credit Suisse see the index in the lower range while RBC Capital Markets expect the S&P 500 to be near 2,500. Additionally, CNBC's Market Strategist Survey foresees price target of 2,325 the S&P 500.
Avi Gilburt also has a ‘strong bullish’ stance assuming that the S&P 500 will remain over the 2,205–2,220 support region. It expects the index to range between 2,537 and 2,611 in 2017. According to the Global Equity Strategy Report, the S&P 500 will likely move up in the mid-single-digit range in 2017.
Adding to the strong bull signal is that wealthy Americans are moving back to the stock market on Trump-induced optimism. A large percentage of millionaires think that the S&P 500 will go up by 5–10% in 2017 and 60% are of the opinion that Trump will be good for stock investing (read: 4 Under-the-Radar ETFs Soaring High After Trump Win).
Positive Historical Trends
The stock market has a tendency to move up during the six-month period (November–April) buoyed by seasonal tailwinds such as mutual fund manager window dressing, pension funds capital influx, investment of year-end bonuses, and funding of individual retirement accounts (IRAs). As per the Stock Trader's Almanac, the S&P 500 index gained an average 7.1% during this six-month period compared to 1.4% from May through October.
How to Play?
Given this, the S&P 500 will likely see solid trading ahead and investors could easily tap this opportune moment by going long on the index. There are a number of leveraged inverse products in the market that offer multiple (2x or 3x) exposure to the index. Below we highlight those and some of the key differences between each:
ProShares Ultra S&P500 ETF (SSO - Free Report)
This is the most popular and liquid ETF in the leveraged space with AUM of over $1.7 billion. The fund seeks to deliver twice the return of the index, charging investors 0.89% in expense ratio. It trades in a solid average daily volume of around 3 million shares.
Direxion Daily S&P 500 Bull 1.25x Shares
This ETF offers 125% exposure to the S&P 500 Index and is the cheapest choice in the large-cap leveraged space, charging just 35 bps in annual fees. It has accumulated $7.2 million in its asset base while trades in a smaller volume of 2000 shares a day on average.
Direxion Daily S&P 500 Bull 2x Shares (SPUU - Free Report)
This product also provides two times (2x) exposure to the index, charging a lower fee of 60 bps. It has $5.4 million in AUM and sees lower volume of about 3,000 shares a day on average.
ProShares UltraPro S&P500 ETF (UPRO - Free Report)
Investors having a more bullish view and higher risk appetite could find UPRO interesting as the fund provides three times (3x) exposure to the index. Though the ETF charges slightly higher fee of 94 bps per year, trading volume is solid. The product exchanges about 2.4 million shares per day on average. It has amassed $718.3 million in its asset base so far.
Direxion Daily S&P 500 Bull 3x Shares (SPXL - Free Report)
This fund also creates a triple leveraged long position in the S&P 500 Index while charging 95 bps in fees a year. It has $534 million in AUM and trades in volume of 2 million shares on average.
Barclays iPath Long Extended S&P 500 TR Index ETN
This is an ETN option providing triple leveraged long position in the index. It charges 35 bps in annual fees and is an unpopular an illiquid option with AUM of $2.3 million and average daily volume of under 1,000 shares (read: ETFs Vs. ETNs: What Investors Need to Know).
UBS ETRACS Monthly Reset 2xLeveraged S&P 500 Total Return ETN
This ETN is linked to the monthly compounded 2x leveraged performance of the S&P 500 Total Return Index. It has AUM of $38.2 million and trades in light volume of under 1,000 shares a day. Expense ratio comes in at 0.85%.
Bottom Line
As a caveat, investors should note that such products are suitable only for short-term traders as these are rebalanced on a daily basis (see: all the Leveraged Equity ETFs here).
Still, for ETF investors who are bullish on the equity market 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 your friend” in this corner of the investing world.
Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>