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Bulls Roar Again in June: Leveraged ETFs in Focus

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After being beaten down badly in May, the bulls came roaring again this month on hopes of an easier monetary policy. In fact, the Dow Jones and S&P 500 witnessed their best weekly gain since late November, rising 4.7% and 4.4%, respectively, while Nasdaq saw its best performance since the week ended Dec 28, inching up 3.9%.

The Fed has signaled to cut interest rates if needed and is closely monitoring the implications of the trade tensions on the economy. The latest weak job data has also stirred speculation on interest rate cuts, thereby boosting the appeal of riskier assets (read: ETFs Set to Soar on Rate Cuts Signal).

Lower rates would make borrowings cheaper, providing a boost to both investment in new projects and repayment of higher-rate debt. As such, it would lead to strong economic growth and is thus a boon for the stock market. Further, President Donald Trump suspended the planned tariffs against Mexico that drove the bulls. A slew of mergers and acquisitions is also adding to the strength.

However, looming U.S.-China trade dispute and global growth concerns continue to weigh on the stocks. Per the latest reports, President Donald Trump will raise tariffs on further Chinese imports if the two countries don’t reach a deal at a meeting of Group of 20 leaders later this month.

While volatility and uncertainty prevail, rate cuts hope has 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 trend remains a friend.

Below we have highlighted six leveraged ETFs that have gained in double digits this month and should continue to do so at least for the near term if the sentiments remain intact.

Direxion Daily Semiconductor Bull 3x Shares SOXL – Up 30.1%

This ETF targets the semiconductor corner of the technology sector with 3x leveraged exposure to the PHLX Semiconductor Sector Index. It has amassed about $649.2 million in its asset base while charging 94 bps in fees per year. Volume is good as it exchanges nearly a million shares a day on average (read: Will Semiconductor ETFs Survive the Huawei Ban?).

Direxion Daily Technology Bull 3x Shares TECL – Up 21.8%

This ETF targets the technology sector with three times exposure to the Technology Select Sector Index. It has amassed about $716.7 million in its asset base and charges 95 bps in fees per year. Volume is good as it exchanges more than 351000 shares a day on average.

Daily Robotics, Artificial Intelligence & Automation Index Bull 3X Shares UBOT – Up 21.8%

This product seeks to deliver three times the daily performance of the Indxx Global Robotics and Artificial Intelligence Thematic Index. It has accumulated $18.4 million in its asset base and trades in average daily volume of 126,000 shares. The ETF charges 95 bps in annual fees (read: 5 Tech ETFs Braving Trade Tensions in May).

Direxion Daily Consumer Discretionary Bull 3X Shares WANT – Up 17.3%

This ETF seeks to offer three times exposure to the Consumer Discretionary Select Sector Index, charging 95 bps in annual fees. It has AUM of $4.4 million and average daily volume of 6,000 shares.

ProShares UltraPro QQQ (TQQQ - Free Report)     – Up 16.4%

This ETF provides three times the returns of the daily performance of the NASDAQ-100 Index. It is one of the popular and liquid options in the leveraged large-cap space with AUM of $3.8 billion and average daily volume of 20 million shares. TQQQ charges 95 bps in fees per year (read: Nasdaq Correction Zone: Short Index With These ETFs).

BMO REX MicroSectors FANG+ Index 3X Leveraged ETN FNGU – Up 16.1%

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 has accumulated $104.9 million in its asset base. It charges 95 bps in annual fees and trades in average daily volume of 209,000 shares.

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 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 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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