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Leveraged or Inverse ETFs Gain Amid Market Crash

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The weeks of panic selling due to the spread of the coronavirus has sent the Wall Street into a tailspin. The major indices slipped into bear territory in less than a month and put an end to the longest-ever bull market, which turned 11 on Mar 9.

In fact, trading on the three major indexes was halted for the second time this week after a decline of 7% that triggered circuit breakers. More specifically, U.S. stocks saw their worst performance on Mar 12 since "Black Monday" on Oct 19, 1987. The latest rout came after President Donald Trump suspended all travel from Europe to the United States for 30 days beginning Mar 13 midnight, with the exception of the United Kingdom (read: Bears Grip Market: 5 Safe ETF Investing Zones).

Fears of economic slowdown from coronavirus crisis have deepened with the rapidly rising number of cases around the world. The pandemic has now spread to 114 countries, infecting nearly 130,000 people worldwide and causing over 4,700 deaths. In the United States, the death toll climbed to 39 with over 1,300 infections. The situation has led to suspension of professional sports games, cancelation of major events, conferences and conventions, and half-empty restaurants, signaling that the longest U.S. economic expansion might come to an end.

Against this backdrop, investors rushed to leveraged or inverse leveraged ETFs to increase returns on quick market turns in a short span. These products either create a leveraged long/short position, an inverse long/short position or a leveraged inverse long/short position in the underlying index through the use of swaps, options, future contracts and other financial instruments. Due to their compounding effect, investors can enjoy higher returns in a very short period of time provided the trend remains a friend.

However, these funds run the risk of huge losses compared to traditional funds in fluctuating or seesawing markets. Still, we have highlighted some leveraged/inverse ETF from different corners that piled up substantial gain over the past week though these involve a great deal of risk when compared to traditional products. This trend might continue at least in the near term, provided the sentiments remain the same (see: all Leveraged Equity ETFs here).

VelocityShares Daily 2x VIX Short-Term ETN (TVIX - Free Report) – Up 62.6%

This note offers two times exposure to the S&P 500 VIX Short-Term Futures Index. TVIX is popular with average daily volume of around 8 million shares and AUM of about $1.5 billion. Expense ratio is much higher at 1.65%.

Direxion Daily S&P Oil & Gas Exp. & Prod. Bear 3X Shares (DRIP - Free Report) – Up 59.2%

This fund seeks three times inverse exposure to the performance of the S&P Oil & Gas Exploration & Production Select Industry Index. DRIP has accumulated $97.9 million in its asset base and trades in solid volume of more than 504,000 shares a day on average. The fund charges 95 bps in annual fees (read: Global Oil Price War Begins: ETFs in Focus).

Direxion Daily Natural Gas Related Bear 3X Shares – Up 53.8%

This product provides three times inverse exposure to the ISE-Revere Natural Gas Index. It has amassed $26.7 million in its asset base and trades in solid volume of 75,000 shares a day on average. The ETF charges 95 bps in fees per year.

Direxion Daily Gold Miners Bull 3X Shares (NUGT) — Up 39.8%

NUGT provides three times exposure to the daily performance of the NYSE Arca Gold Miners Index. It charges 92 bps in annual fees and has gathered $1.4 billion in its asset base. Volume is heavy with around 11.6 million shares exchanged per day, on average.

Direxion Daily Utilities Bull 3X Shares (UTSL - Free Report) – Up 25.3%

With AUM of $14.6 million, this fund offers three times exposure to the performance of the Utilities Select Sector Index. It charges investors annual fee of 95 bps and trades in lower average daily volume of 31,000 shares.

MicroSectors U.S. Big Banks Index -3X Inverse Leveraged ETN (BNKD - Free Report) – Up 21%

BNKD seeks to offer three times inverse leveraged exposure to the Solactive MicroSectors U.S. Big Banks Index. The ETN has accumulated $24.9 million in its asset base. It charges 95 bps in annual fees and trades in average daily volume of about 3,000 shares (read: Coronavirus Fuels Madness in These Sector ETFs & Stocks).

Direxion Daily Consumer Staples Bull 3X Shares (NEED - Free Report) – Up 20.1%

This ETF provides three times exposure to the performance of the Consumer Staples Select Sector Index and charges investors 95 bps in annual fees. It has been able to manage $6.2 million in its asset base and trades in average daily volume of 9,000 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.

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