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S&P 500 to Gain After Election: Leveraged ETFs in Focus
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America will go to the polls today. Political gridlock in Washington still persists with chances of an outcome consisting of a Democratic-controlled House and Republican-majority Senate. Per the latest CNN Poll conducted by SSRS, Democrats continue to hold a double-digit lead over Republicans in a generic congressional ballot among likely voters.
Democrats are likely to benefit from a massive gender gap that persisted throughout fall (women favor Democrats 62% to 35%, while men are about evenly divided, 49% back the Republican while 48% support the Democrat in their district), a wide lead among political independents (53% for the Democrat to 39% for the Republican), and strong support from black and Latino voters (88% of black voters and 66% of Latino voters favor the Democrats).
Trump's approval rating has dropped from 4% in early October to 39% with 55% disapproving versus 52% a month earlier. That is the worst pre-election approval rating for any president approaching their first mid-term election in polling dating back to Eisenhower (read: Trump's Approval Rises Before Midterms: ETFs to Lose/Gain).
However, a divided government or a Democrat win of the House will continue to keep America's fiscal, trade and regulatory policies on the same trajectory though it might prevent the government from enacting new policies keeping the status quo. Additionally, a divided government many not actually derail the nine-and-a-half year bull market but might reshuffle the sector winners and losers. History suggests that mid-term election could spark a big year-end rally.
If we go by history, the S&P 500 gained an average of 2.7% post-election in the fourth quarter with a positive trade of 66% of the time no matter who wins. Per etftrends.com, if the Republicans manage to maintain control of Congress, it will be similar to when Bush held office with Bill Frist and Dennis Hastert in Congress during 2002. The S&P 500 was up 0.9% post-election day and increased 1.2% six months later and 14.9% a year later.
How to Play?
Investors could easily tap this opportune moment by going long on the index. There are a number of leveraged products in the market that offer multiple (more than one time) exposure to the index through the use of swaps, options, future contracts and other financial instruments. Below we highlight those and some of the key differences between each:
PortfolioPlus S&P 500 ETF
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 $76.9 million in its asset base while trading in a light volume of 3,000 shares a day on average.
This is the most popular and liquid ETF in the leveraged space with AUM of $2.4 billion and average daily volume of around 1.8 million shares. The fund seeks to deliver two times (2x) the return of the index, charging investors 0.90% in expense ratio.
While this product also provides 2x exposure to the index, it charges a lower fee of 60 bps. It has a lower level of $6.6 million in AUM and sees a lower volume of about 6,000 shares a day on average (read: Must-Watch ETF Areas Before Mid-Term Elections).
This fund provides three times (3x) exposure to the index with an expense ratio of 0.92%. Average trading volume is solid, exchanging nearly 4 million shares per day on average. It has amassed $1.4 billion in its asset base.
Like UPRO, this fund also creates 3x long position in the S&P 500 index with an expense ratio of 0.95%. It has AUM of $1 billion and trades in average daily volume of nearly 3.5 million shares.
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 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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S&P 500 to Gain After Election: Leveraged ETFs in Focus
America will go to the polls today. Political gridlock in Washington still persists with chances of an outcome consisting of a Democratic-controlled House and Republican-majority Senate. Per the latest CNN Poll conducted by SSRS, Democrats continue to hold a double-digit lead over Republicans in a generic congressional ballot among likely voters.
Democrats are likely to benefit from a massive gender gap that persisted throughout fall (women favor Democrats 62% to 35%, while men are about evenly divided, 49% back the Republican while 48% support the Democrat in their district), a wide lead among political independents (53% for the Democrat to 39% for the Republican), and strong support from black and Latino voters (88% of black voters and 66% of Latino voters favor the Democrats).
Trump's approval rating has dropped from 4% in early October to 39% with 55% disapproving versus 52% a month earlier. That is the worst pre-election approval rating for any president approaching their first mid-term election in polling dating back to Eisenhower (read: Trump's Approval Rises Before Midterms: ETFs to Lose/Gain).
However, a divided government or a Democrat win of the House will continue to keep America's fiscal, trade and regulatory policies on the same trajectory though it might prevent the government from enacting new policies keeping the status quo. Additionally, a divided government many not actually derail the nine-and-a-half year bull market but might reshuffle the sector winners and losers. History suggests that mid-term election could spark a big year-end rally.
If we go by history, the S&P 500 gained an average of 2.7% post-election in the fourth quarter with a positive trade of 66% of the time no matter who wins. Per etftrends.com, if the Republicans manage to maintain control of Congress, it will be similar to when Bush held office with Bill Frist and Dennis Hastert in Congress during 2002. The S&P 500 was up 0.9% post-election day and increased 1.2% six months later and 14.9% a year later.
How to Play?
Investors could easily tap this opportune moment by going long on the index. There are a number of leveraged products in the market that offer multiple (more than one time) exposure to the index through the use of swaps, options, future contracts and other financial instruments. Below we highlight those and some of the key differences between each:
PortfolioPlus S&P 500 ETF
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 $76.9 million in its asset base while trading in a light volume of 3,000 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 $2.4 billion and average daily volume of around 1.8 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 also provides 2x exposure to the index, it charges a lower fee of 60 bps. It has a lower level of $6.6 million in AUM and sees a lower volume of about 6,000 shares a day on average (read: Must-Watch ETF Areas Before Mid-Term Elections).
ProShares UltraPro S&P500 ETF (UPRO - Free Report)
This fund provides three times (3x) exposure to the index with an expense ratio of 0.92%. Average trading volume is solid, exchanging nearly 4 million shares per day on average. It has amassed $1.4 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 an expense ratio of 0.95%. It has AUM of $1 billion and trades in average daily volume of nearly 3.5 million shares.
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 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.
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 >>