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Best August for US Stocks in 4 Years: 5 Top Leveraged ETFs

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The month of August was strong for the U.S. stock market with the Dow Jones and the S&P 500 notching their best performances for the month since 2014, climbing 2.1% and 3%, respectively. Notably, the S&P 500 topped a new milestone of 2,900. The Nasdaq Composite also logged its best August since 2000, with gains of 5.7%.

Most of the gains were driven by the renewed surge in broader technology sector and the trade deal between the United States and Mexico, which the paves way for the replacement of North American Free Trade Agreement (NAFTA) and optimism about a deal with Canada. Additionally, strong corporate earnings and a slew of upbeat data, which underscores strengthening of the economy, led to a risk-on trade (read: U.S.-Mexico Trade Deal to Revamp NAFTA: ETF Winners).  

This has resulted in a strong 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 (read: Leveraged ETFs: How Do They Work and What's Hot Now?).

Below, we have highlighted five ETFs that have piled up abnormal returns in August. These funds will continue to be investors’ darling provided the sentiments remain the same.

Direxion Daily S&P Biotech Bull 3x Shares (LABU - Free Report) – Up 17.7%

This 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 $441.9 million (read: Biotech ETFs in Focus on String of Q2 Earnings Beat).

ProShares Ultra Telecommunications (LTL - Free Report) – Up 12.2%

This product provides two times exposure to the daily performance of the Dow Jones U.S. Select Telecommunications Index. It has been able to manage $1.1 million in its asset base and trades in lower volume of about 1,000 shares per day on average. Expense ratio is 0.95%.

ProShares UltraPro Russell 2000 (URTY - Free Report) - Up 12%

This fund provides three times exposure to the Russell 2000 Index with an expense ratio of 0.95%. However, it is a relatively less popular and less liquid in the small cap space with AUM of $182.1 million and average daily volume of 111,000 shares.

Direxion Daily Retail Bull 3X Shares (RETL - Free Report) – Up 11.9%

This ETF offers three times leveraged exposure to the S&P Retail Select Industry Index. The product has amassed about $42.9 million in its asset base, while charging 95 bps in fees per year. Volume is lower as it exchanges around 26,000 shares a day on average (read: 6 Reasons to Bet on Retail ETFs Now).

Direxion Daily Technology Bull 3x Shares (TECL - Free Report) – Up 11.6%

This ETF targets the technology sector with three times leveraged exposure to the Technology Select Sector Index. It has amassed about $793.8 million in its asset base and charges 95 bps in fees per year. Volume is good as it exchanges around 209,000 shares a day on average (read: Bet on the Top Leveraged ETFs of the Longest-Ever Bull Market).

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 seesawing 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 U.S. equities for the near term, any 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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