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Best Leveraged/Inverse ETFs of June

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The month of June started with a bang, extending the two-month bull rally. The optimism over accelerating economic activities as many states reopened, a booming technology sector, an unprecedented stimulus, and hopes of a potential coronavirus vaccine were the biggest catalysts in driving the stocks higher.

Additionally, the Fed’s additional stimuli to provide liquidity in the markets and the Trump administration’s $1 trillion infrastructure proposal added to the strength. The central bank announced that it would begin purchasing individual corporate bonds as part of its emergency lending program to inject liquidity into the virus-stricken economy (read: Fed's New Stimulus Regains Confidence: 4 ETF Picks).

However, renewed concerns over a second wave of coronavirus disease charged up the bears lately, bringing volatility back in market. New coronavirus cases in the United States surpassed 2.5 million on Sunday as a crushing new wave of infections continued to bear down throughout the country’s South and West regions. Across the nation, 40,587 new daily cases were reported. Florida, Texas and Arizona are emerging as the country’s latest epicenters after reporting record numbers of new infections for weeks in a row. Positivity rates and hospitalizations have also spiked. The rise in new infections has sparked off worries that reopening of businesses and economies could be curtailed again, slowing down the current recovery, which, however, is faster than expected.

Further, reemergence of trade tension and International Monetary Fund’s (IMF) downgrade of economic growth outlook added to the chaos. Washington is considering new tariffs on $3.1 billion worth of European imports in a move that would deteriorate a transatlantic dispute over aircraft subsidies, according to the Office of the U.S. Trade Representative. Meanwhile, IMF expects a deeper global recession, with GDP likely to shrink 4.9%, much sharper than the 3.0% contraction predicted in April.

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 that piled up substantial gains this month 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).

Direxion Daily S&P Biotech Bull 3x Shares (LABU - Free Report) – Up 17.5%

This fund creates a 3X leveraged long position on the S&P Biotechnology Select Industry Index. It charges an annual fee of 1.04% and trades in heavy average daily volume of about 2.7 million shares. The fund has AUM of $354.7 million.

ProShares UltraShort Utilities ETF (SDP - Free Report) – Up 13.8%

This fund seeks to deliver twice (2X or 200%) the inverse return of the daily performance of the Dow Jones U.S. Utilities Index. It has $1.8 million in AUM and average trading volume of nearly 16,000 shares per day.

BMO REX MicroSectors FANG+ Index 3X Leveraged ETN (FNGU - Free Report) – Up 13.2%

This note seeks to offer three times leveraged exposure to the NYSE FANG Index, charging 95 bps in annual fees. The ETN has accumulated $272.3 million in its asset base and trades in average daily volume of 420,000 shares.

Direxion Daily Technology Bull 3x Shares (TECL - Free Report) — Up 10.1%

This ETF targets the broad technology sector with three times exposure to the Technology Select Sector Index. It has amassed about $1.4 billion in its asset base and charges 95 bps in fees per year. Volume is good as it exchanges around 720,000 shares a day, on average (read: Coronavirus Infections Resurge: Tech ETFs to Thrive).

Direxion Daily Semiconductor Bull 3x Shares (SOXL - Free Report) — Up 9.3%

This ETF targets the semiconductor corner of the technology sector with 3X leveraged exposure to the PHLX Semiconductor Sector Index. It has amassed about $1.3 billion in its asset base while charging 93 bps in fees per year. Volume is good as it exchanges 2.2 million shares per day, on average.

ProShares UltraShort Health Care (RXD - Free Report) – Up 8.1%

This fund offers exposure to two times the inverse of the daily performance of the Dow Jones U.S. Health Care Index. It has managed assets worth $2.6 million in its asset base and trades in average daily volume of 7,000 shares. The ETF charges 95 bps in annual fees.

ProShares UltraPro QQQ (TQQQ - Free Report) – Up 8.1%

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 $5.8 billion and average daily volume of 41.9 million shares. TQQQ charges 95 bps in fees per year (read: Nasdaq is Burning Hot: How to Make the Most of it With ETFs).

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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