Wall Street started the fourth quarter on a solid note given the return of risk-on trade. The S&P 500 and the Dow Jones broke important thresholds of 3,100 and 28,000, respectively, for the first time ever. The optimism came on the back of easing U.S.-China trade worries, stronger-than-expected corporate earnings and Fed’s third rate cut that has bolstered confidence in the stock market (read: S&P 500 at Record High: 6 ETF Winners of Last Week).
This combination of factors 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 market remains bullish.
However, these funds run the risk of 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 a shorter period (such as, weeks or months).
Still, we have highlighted a few leveraged equity ETFs that have piled up more than 25% returns so far in the fourth quarter and could continue to be investors’ darlings. This trend might continue at least in the near term provided the sentiments remain the same (see: all the Leveraged Equity ETFs here).
Direxion Daily S&P Biotech Bull 3x Shares (LABU - Free Report) – Up 45.5%
This fund creates a 3x leveraged long position on 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 2.3 million shares. The fund has AUM of $493.2 million.
ProShares UltraPro Nasdaq Biotechnology ETF – Up 44.9%
This ETF seeks to deliver three times the daily performance of the NASDAQ Biotechnology Index, charging 95 bps in fees per year. UBIO has accumulated $23.4 million in its asset base and trades in a lower volume of around 38,000 shares a day on average (read: Top-Ranked ETFs That Crushed the Market in a Month).
BMO REX MicroSectors FANG+ Index 3X Leveraged ETN (FNGU - Free Report) – Up 39.2%
This note seeks to offer three times leveraged exposure to the NYSE FANG Index, charging 95 bps in annual fees. The ETN has accumulated $148.6 million in its asset base and trades in average daily volume of 138,000 shares.
Direxion Daily Semiconductor Bull 3x Shares (SOXL - Free Report) – Up 33.4%
SOXL offers 3x leveraged exposure to the PHLX Semiconductor Sector Index. It has amassed about $657 million in its asset base while charging 94 bps in fees per year. Volume is good as it exchanges nearly 951,000 shares a day on average.
Direxion Daily Technology Bull 3x Shares (TECL - Free Report) — Up 27%
This ETF targets the technology sector with three times exposure to the Technology Select Sector Index. It has amassed about $852.1 million in its asset base and charges 95 bps in fees per year. Volume is good as it exchanges around 295,000 shares a day on average.
MicroSectors U.S. Big Banks Index 3X Leveraged ETN (BNKU - Free Report) – Up 26.8%
BNKU seeks to offer three times exposure to the Solactive MicroSectors U.S. Big Banks Index. The ETN has accumulated $35.1 million in its asset base. It charges 95 bps in annual fees and trades in average daily volume of under 1,000 shares (read: Why Financials ETFs Are On Fire).
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. Still, for ETF investors who are bullish on U.S. equities for the near term, any of the above-mentioned 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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