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After the best quarter of gains in a decade, U.S. stocks continued their stellar trend to start the second quarter. The S&P 500 index is hitting new all-time highs lately driven by bouts of upbeat data and better-than-expected earnings, which eased fears of earnings recession. In particular, the U.S. economy expanded at a faster-than-expected rate of 3.2% in the first quarter of 2019, marking the best GDP growth to start the year since 2015 (read: US Q1 GDP Growth Trumps Expectations: ETF Areas to Win).
Meanwhile, corporate results have turned out better than many had expected in the market. Of the 230 S&P members that reported Q1 results through Apr 26, 79.1% have beaten EPS estimates and 58.7% have beaten revenue estimates. The proportion of EPS beats in Q1 at this stage is the second highest for this group of 230 S&P 500 members in the last five years though revenue surprises are modestly on the low side relative to other recent periods.
All these fundamentals have resulted in huge 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 market remains bullish.
Below we have highlighted five leveraged equity ETFs that have piled up more than 15% returns in April and could continue to be investors’ darlings.
Direxion Daily Communication Services Index Bull 3X Shares – Up 25.1%
This ETF seeks to deliver three times (300%) the performance of the Communication Services Select Sector Index, charging investors 95 bps in annual fees. It has AUM of $3.7 billion and average daily volume of 8,000 shares.
This ETF targets the semiconductor corner of the technology sector with 3x leveraged exposure to the PHLX Semiconductor Sector Index. It has amassed about $601.2 million in its asset base while charging 94 bps in fees per year. Volume is good as it exchanges nearly 932,000 shares a day on average (read: Chipmakers on Fire: ETFs & Stocks Soaring to New Highs).
NAIL provides leveraged exposure to homebuilders and creates a three times long position in the Dow Jones U.S. Select Home Construction Index. It charges an annual fee of 95 bps and trades in lower average daily volume of about 64,000 shares. The fund has accumulated $45.3 million in its asset base.
ProShares UltraPro Financial Select Sector – Up 18.9%
This product provides three times exposure to the daily performance of the S&P Financial Select Sector Index. It has been able to manage $30.6 million in its asset base and trades in a lower volume of about 16,000 shares per day on average. Expense ratio is 0.95%.
This fund seeks to deliver three times the returns of the S&P Regional Banks Select Industry Index, charging 95 bps in fees per year. It has accumulated $24.7 million in its asset base and trades in average daily volume of around 58,000 shares a day on average (read: Banking Earnings Mixed, ETFs Gain Moderately).
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, the ETFs’ performance 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 the 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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5 Top-Performing Leveraged ETFs of April
After the best quarter of gains in a decade, U.S. stocks continued their stellar trend to start the second quarter. The S&P 500 index is hitting new all-time highs lately driven by bouts of upbeat data and better-than-expected earnings, which eased fears of earnings recession. In particular, the U.S. economy expanded at a faster-than-expected rate of 3.2% in the first quarter of 2019, marking the best GDP growth to start the year since 2015 (read: US Q1 GDP Growth Trumps Expectations: ETF Areas to Win).
Meanwhile, corporate results have turned out better than many had expected in the market. Of the 230 S&P members that reported Q1 results through Apr 26, 79.1% have beaten EPS estimates and 58.7% have beaten revenue estimates. The proportion of EPS beats in Q1 at this stage is the second highest for this group of 230 S&P 500 members in the last five years though revenue surprises are modestly on the low side relative to other recent periods.
Additionally, hopes of a U.S.-China trade deal, a surge in oil price and a patient Fed continued to boost the stock market (read: 5 Top-Ranked Stocks in S&P 500 ETF Up More Than 50%).
All these fundamentals have resulted in huge 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 market remains bullish.
Below we have highlighted five leveraged equity ETFs that have piled up more than 15% returns in April and could continue to be investors’ darlings.
Direxion Daily Communication Services Index Bull 3X Shares – Up 25.1%
This ETF seeks to deliver three times (300%) the performance of the Communication Services Select Sector Index, charging investors 95 bps in annual fees. It has AUM of $3.7 billion and average daily volume of 8,000 shares.
Direxion Daily Semiconductor Bull 3x Shares (SOXL - Free Report) – Up 24.6%
This ETF targets the semiconductor corner of the technology sector with 3x leveraged exposure to the PHLX Semiconductor Sector Index. It has amassed about $601.2 million in its asset base while charging 94 bps in fees per year. Volume is good as it exchanges nearly 932,000 shares a day on average (read: Chipmakers on Fire: ETFs & Stocks Soaring to New Highs).
Direxion Daily Homebuilders & Supplies Bull 3X Shares (NAIL - Free Report) - Up 20.5%
NAIL provides leveraged exposure to homebuilders and creates a three times long position in the Dow Jones U.S. Select Home Construction Index. It charges an annual fee of 95 bps and trades in lower average daily volume of about 64,000 shares. The fund has accumulated $45.3 million in its asset base.
ProShares UltraPro Financial Select Sector – Up 18.9%
This product provides three times exposure to the daily performance of the S&P Financial Select Sector Index. It has been able to manage $30.6 million in its asset base and trades in a lower volume of about 16,000 shares per day on average. Expense ratio is 0.95%.
Direxion Daily Regional Banks Bull 3x Shares (DPST - Free Report) – Up 18.4%
This fund seeks to deliver three times the returns of the S&P Regional Banks Select Industry Index, charging 95 bps in fees per year. It has accumulated $24.7 million in its asset base and trades in average daily volume of around 58,000 shares a day on average (read: Banking Earnings Mixed, ETFs Gain Moderately).
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, the ETFs’ performance 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 the 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.
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 >>