Escalating tensions between the United States and other countries have led to renewed trade war fears in June making investors jittery. Additionally, the acute emerging market sell-off as well as a strong dollar have added to the woes. Even rounds of solid economic data from most part of the world and higher oil price have done little to bolster optimism in the stock market (read: Inverse ETFs Surge as Trade War Fears Escalate).
Thanks to heightened volatility and uncertainty, the leveraged and inverse leveraged space have grabbed maximum investor attention in June. This is because investors jumped into the products in this space to magnify returns on quick market turns. In fact, the ongoing trend has resulted in heavy loss from the global stock funds at a pace not seen since the financial crisis exploded.
According to market research firm TrimTabs, investors have pulled out $12.4 billion from the global equity funds in June — a level not seen since October 2008. Emerging markets saw maximum outflows while the United States gained love owing to a strengthening economy (read: Should These 3 Emerging Country ETFs Fear Fed Rate Hikes?).
In such a scenario, investors could generate big gains in a short span. These products 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 very short period of time provided the trend remains a friend.
However, these funds run the risk of huge losses compared with 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).
Below we have highlighted five ETFs that have piled up stupendous returns in June. These funds will continue to be investors’ darlings provided the sentiments remain the same.
Direxion Daily FTSE China Bear 3x Shares (YANG - Free Report) – Up 26.7%
This fund provides three times (300%) the inverse return of the FTSE China 50 Index. It has AUM of around $67.6 million and sees good trading volume of 164,000 shares a day on average. Expense ratio came in at 0.95%.
Direxion Daily Emerging Markets Bear 3X Shares (EDZ - Free Report) – Up 19.4%
This ETF offers three times inverse exposure to the MSCI Emerging Markets Index, charging investors 95 bps in annual fees. It has amassed about $91 million in its asset base while trading in good volumes of 303,000 shares a day on average (read: $8 Trillion Worth of EM Stocks in a Bear Market: ETFs to Play).
Direxion Daily Retail Bull 3X Shares (RETL - Free Report) – Up 19%
This ETF offers three times leveraged exposure to the S&P Retail Select Industry Index. The product has amassed about $21.8 million in its asset base, while charges 95 bps in fees per year. Volume is lower as it exchanges around 30,000 shares a day on average.
BMO REX MicroSectors FANG+ Index 3X Leveraged ETN (FNGU - Free Report) – Up 17.2%
This note seeks to offer three times leveraged exposure to 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 ETN debuted in late January and has accumulated $85.6 million since then. It charges 95 bps in annual fees and trades in average daily volume of 99,000 shares (read: Tech ETFs Scaling New Highs on Surging FANG Stocks).
ProShares UltraShort MSCI Brazil Capped ETF (BZQ - Free Report) – Up 17.1%
This fund seeks to deliver twice (200%) the inverse performance of the MSCI Brazil 25/50 Index. The benchmark is a market capitalization weighted index designed to measure the equity market performance of the Brazilian market. The product has amassed $35.3 million in its asset base while charging 95 bps in fees and expenses. It trades in moderate volume of about 50,000 shares a day.
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 the biggest problem for these products that could make them more expensive than they appear.
Still, ETF investors seeking to tap abrupt movements can go long or short in the near term.
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