September has been kind to the U.S. stock market thanks to another Fed rate cut and positive trade developments that have led to renewed trade of riskier assets. Notably, the Dow Jones and the S&P 500 were up 2% and 1.7%, respectively, last month while Nasdaq added 0.5%.
Additionally, bouts of upbeat data pointing to an uptick in inflation, higher consumer and business confidence, high retail sales, strong recovery in the U.S. housing market and solid manufacturing activity, which underscore the health of the economy, added to the strength. However, trade uncertainty, Brexit issues and geopolitical tensions continued to weigh on the stock performance (read: Top ETF Areas of September).
The recovering fundamentals have led to 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 positive.
Below we highlighted some leveraged equity ETFs that piled up more than 15% returns last month. These funds will continue to be investors’ darlings provided the sentiments remain bullish.
Direxion Daily Retail Bull 3X Shares (RETL - Free Report) – Up 21.6%
This ETF offers three times leveraged exposure to the S&P Retail Select Industry Index. The product has amassed about $13.3 million in its asset base, while charging 95 bps in fees per year. Volume is lower as it exchanges around 31,000 shares a day on average.
MicroSectors U.S. Big Banks Index 3X Leveraged ETN (BNKU - Free Report) – Up 20.6%
BNKU seeks to offer three times leveraged exposure to the Solactive MicroSectors U.S. Big Banks Index. The ETN has accumulated $28 million in its asset base. It charges 95 bps in annual fees and trades in average daily volume of under 1,000 shares (read: Bank ETFs Benefit From Steepening Yield Curve, But How Long?).
Daily Robotics, Artificial Intelligence & Automation Index Bull 3X Shares (UBOT - Free Report) – Up 19.1%
This product seeks to deliver three times the daily performance of the Indxx Global Robotics and Artificial Intelligence Thematic Index. It has accumulated $18.8 million in its asset base and trades in average daily volume of 126,000 shares. The ETF charges 95 bps in annual fees.
Direxion Daily Homebuilders & Supplies Bull 3X Shares (NAIL - Free Report) - Up 19%
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 52,000 shares. The fund has accumulated $52.6 million in its asset base (read: Here's Why Homebuilding ETFs Are Soaring).
Direxion Daily Regional Banks Bull 3x Shares (DPST - Free Report) – Up 17.5%
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 $20.2 million in its asset base and trades in average daily volume of around 38,000 shares a day on average.
MicroSectors U.S. Big Oil Index 3X Leveraged ETN (NRGU - Free Report) – Up 15.8%
This ETN provides levered exposure to the Solactive MicroSectors U.S. Big Oil Index, which is equal-dollar weighted and provides exposure to the 10 largest U.S. energy and oil companies. It has been able to manage $41 million in its asset base while trades in average daily volume of less than 500 shares. Expense ratio comes in at 0.95% (read: Leveraged Oil & Energy ETFs to Play on Saudi Attack).
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 funds’ 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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