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Leveraged ETFs to Bet on Market Rebound for Big Gains

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After a vicious selloff last week, the Wall Street is back in the green for the year, bouncing back strongly from their lowest level, which had sent the major indices to a correction territory. Major indices climbed for the fourth consecutive session with the Dow Jones Industrial Average adding more than 1,000 points and the S&P 500 index surging 4.6% — the strongest four-session performance since mid-2016.

Meanwhile, the CBOE Volatility index, also known as fear gauge, slipped below 20 after jumping to above 50 last week.

Inside The Rebound

There are several reasons for a renewed rally in the market. First, the long-term fundamentals remain bullish for stocks given solid corporate earnings and accelerating global economic growth. The euphoria surrounding the tax reform has been the biggest catalyst this year, as it will perk up the economy and save billions for corporations, leading to reflation trade and an earnings boost. Given this, the tumultuous ride in stocks last week has provided investors an opportunity to buy on the dip.    

Secondly, fear of inflation seems to be abating though the core Consumer Price Index increased more than expected in January. This is because a year-over-year increase of 1.8% in inflation is on par with the same period a year ago. This means that inflation is rising but under control. Additionally, downbeat data for retail sales calmed inflation fears. U.S. retail sales dipped 0.3% in January — the lowest level in 11 months, signaling that the economy may not be expanding too quickly (read: Short These Sector ETFs on Rising Rate Concerns).

As a result, inflationary expectation that has triggered the worst sell-off in many years comes out to be temporary indicating that the worst of the market pullback is over.

If these weren’t enough, the Arms Index, also known as the short-term trading index and used to measure buying or selling intensity, suggests that investors are currently in a buying mood. This is especially true as the NYSE Arms Index fell to the lowest level in 15 months at 0.447. It is calculated by dividing the Advance-Decline Ratio by the Advance-Decline Volume Ratio. An Arms index value above 1.00 is a bearish signal while value below 1.00 is a bullish sign. A value of 1.00 indicates a balanced market.

Given this, investors might seek to tap the strong rebound in the stock market for big gains in a short span. For them, a leveraged play could be an excellent idea as these could lead to huge gains in a very short time frame when compared with simple products.

Leveraged ETFs 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 (read: Leveraged ETFs: How Are They Built and What's Hot Now?).

Below we highlight several products that could garner huge profits from the current bullish sentiments in a short span.

Direxion Daily S&P 500 Bull 3x Shares SPXL

This fund creates a three times (3x) leveraged long position in the S&P 500 Index while charging 95 bps in fees a year. It has $1.2 billion in AUM and trades in heavy volume of 2.4 million shares on average. The product surged 14% in the past four days since Feb 8.

ProShares UltraPro Dow30 UDOW

This ETF delivers three times the return of the Dow Jones Industrial Average, charging 95 bps in fees a year. It has amassed $574.4 million in its asset base while trades in solid average daily volume of 686,000 shares. The product was up 13% since Feb 8.

BMO REX MicroSectors FANG+ Index 3X Leveraged ETN FNGU

This ETN seeks to deliver three times the performance of the NYSE FANG Index, which is an equal-dollar weighted index targeting the highly-traded growth stocks of next-generation technology and tech-enabled companies in the technology and consumer discretionary sectors. The index holds 10 constituents including the FAANG stocks — Facebook FB, Apple AAPL, AMZN, Netflix (NFLX - Free Report) and Alphabet (GOOGL) — and five actively traded technology growth stocks, namely Alibaba BABA, Baidu BIDU, Nvidia NVDA, Tesla TSLA and Twitter TWTR. FNGU debuted in late January and has accumulated $49.1 million since then. It charges 95 bps in annual fees and has soared 24% since Feb 8 (read: Inside the Leveraged & Inverse FAANG ETNs Launch).

Direxion Daily Regional Banks Bull 3x Shares DPST

This fund seeks to deliver three times the return of the S&P Regional Banks Select Industry Index, charging 95 bps in fees per year. DPST has accumulated $39 million in its asset base and trades in paltry volume of around 34,000 shares a day on average. It has gained 18% in the same time frame.

Direxion Daily Technology Bull 3x Shares TECL

This ETF targets the broad U.S. technology sector with 3x leveraged exposure to the Technology Select Sector Index. It has amassed about $557.2 million in its asset base while charges 95 bps in fees per year from investors. Volume is good as it exchanges around 178,000 shares a day on average. TECL has added 18% in the past four sessions (read: Can Tech ETFs Regain Investors' Love After Selloff Snub?).

Direxion Daily S&P Biotech Bull 3x Shares LABU

The fund creates a 3x leveraged long position in the S&P Biotechnology Select Industry Index. It charges an annual fee of 95 bps and trades in a heavy average daily volume of about 1.1 million shares. The fund has accumulated AUM of $372 million and gained 17% in the past four sessions.

Bottom Line

As a caveat, investors should note that these products are extremely volatile and suitable only for short-term traders. Additionally, the daily rebalancing, when combined with leverage, may make these products deviate significantly from the expected long-term performance figures (see: all the Leveraged Equity ETFs here).

Still, for ETF investors who are bullish on equities in the near term, either of the above products can be 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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