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Leveraged S&P 500 ETFs to Play as Index Crosses 2,900 Mark

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It’s been a pleasant journey for the S&P 500 for the last nine-and-a-half years. The equity bull market turned 3,453 days on Aug 22, marking the longest stretch in American history. And maintaining this superb stretch, the S&P 500 crossed the 2,900-mark in intraday trading on Aug 28, for the first time ever. The index closed at 2,897.52 on the day (read: 4 ETF Picks as Nasdaq Hits 8,000).

Barclays upped its year-end projection for the S&P 500 of late to 3,000 points from 2,900 set in June in order to reflect strong second-quarter earnings. Let’s take a look at what’s leading the rally in the Index.

Abating Trade Tensions

The operating backdrop of Wall Street has been highly favorable since President Trump took the oath of office. Solid fiscal reflation, deregulation, further job creation and the passing of the tax reform took Wall Street to newer heights. Only trade war and rising rate concerns have cast a shadow on the broader market this year, with the former being a more pressing problem.

It’s been around six months tensions between the United States and China along with the likes of Canada and Mexico have been rife. But, the overall market got a boost on Aug 27 from easing trade tensions as the United States and Mexico agreed on a new bilateral trade deal which will likely rewrite the North American Free Trade Agreement (NAFTA). Meanwhile, the US-China trade talks have been put on hold, according to US Treasury Secretary Steven Mnuchin. These have worked wonders for Wall Street (read: U.S.-Mexico Trade Deal to Revamp NAFTA: ETF Winners).

Upbeat Economy

Sturdy U.S. economic growth, a healing labor market and tax reforms drove the index. The unemployment rate at the start of the bull market was 8.3% while it was 3.9% in July 2018. U.S. consumer confidence is near an 18-year high in August. Consumers’ judgment on both current business and labor market conditions improved in the month. Most importantly, the Atlanta Fed raised its estimate for the Q3 U.S. GDP to about 4.6% from 4.3%.

Impressive Earnings

The S&P 500 (90.4% companies have already reported) came up with an earnings beat ratio of 79% and revenue beat ratio of 72.3% in Q2. Tech earnings rose 25.5% in the quarter on 10.2% higher revenues, per the Earnings Trends issued on Aug 9. Investors should note that the Q2 marks two consecutive quarters of earnings growth of more than 24%.

Tax reform is definitely adding up to solid earnings gain this year.Even if the tax overhaul is excluded, earnings growth in the second quarter would be around 17.6% (still the highest since 2011), per Credit Suisse, as quoted on Bloomberg.

How to Play?

Given the solid fundamentals, the S&P 500 seems to have more room for growth. Investors could easily cash in on this opportune moment by going long on the Index. There are a number of leveraged products in the market that offer wide exposure to the Index. Below we highlight some of those.

PortfolioPlus S&P 500 ETF (PPLC - Free Report)

This ETF offers 1.25 times (1.25x) exposure to the index and is the cheapest choice in the large-cap leveraged space, charging just 37 bps in annual fees. It has accumulated $83.8 million in its asset base, trading in a moderate volume of 3,500 shares a day on average.

ProShares Ultra S&P500 ETF (SSO - Free Report)

This is the most popular and liquid ETF in the leveraged space with AUM of $2.7 billion and average daily volume of around 1.6 million shares. The fund seeks to deliver two times (2x) the return of the Index, charging investors 0.90% in expense ratio.

Direxion Daily S&P 500 Bull 2x Shares (SPUU - Free Report)

While this product provides 2x exposure to the Index, it charges a lower fee of 60 bps. It has a lower level of $7.7 million in AUM and sees a lower volume of about 5,000 shares a day on average.

ProShares UltraPro S&P500 ETF (UPRO - Free Report)

This fund provides three times (3x) exposure to the Index with an expense ratio of 0.95%. Average trading volume is solid, exchanging nearly 2.96 million shares per day on average. It has amassed $1.47 billion in its asset base.

Direxion Daily S&P 500 Bull 3x Shares (SPXL - Free Report)

Like UPRO, this fund also creates 3x long position in the S&P 500 Index with the same expense ratio. It has AUM of $936.9 million and trades in average daily volume of nearly 2.9 million shares.

Bottom Line

As a caveat, investors should note that these products are extremely volatile and suitable only for short-term trading. (see: all the Leveraged Equity ETFs here).

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