U.S. Markets closed

3 Leveraged Large Cap ETFs to Play the Bull Market

Zacks Equity Research
DG vs. TJX: Which Stock Is the Better Value Option?

U.S. equities have had a stellar run on robust growth and rising optimism around President Donald Trump’s tax reform.


Senate Passes GOP Tax Bill


The Senate passed the GOP tax bill just after midnight in Washington on Wednesday. The bill passed 51 to 48 and will be sent to the House for a final vote before it can be signed by Trump. The final vote in the House is required as three provisions were stripped from the bill, owing to Senate rules. However, this vote is considered a formality.


The corporate tax rate will be cut to 21% from the current 35%. Moreover, repatriating foreign earnings is expected to get cheaper, as the proposed version would tax companies' overseas income held as cash at 15.5%, while non-cash holdings will be taxed at 8%.  


Individual income taxes will be cut but will expire in 2025, unlike corporate taxes. Although seven tax brackets are maintained, various analyses predict that few middleclass earners might have a higher tax bill.


Tax Bill Implications


Per a Financial Times article citing a Barclays analysis, it has been estimated that average earnings per share will be increased by 6.3% in 2018 owing to tax reform savings.


However, in the long run, major concerns remain around the deficit the tax bill will add. The Treasury department suggested that GDP will grow at 2.9% in the next decade and will raise $1.8 trillion in the period, which will provide an additional $300 billion over and above the tax revenue deficit. However, this is in stark contrast to other analyses that suggest a more conservative growth estimate and an addition to the deficit ranging from $448 billion to more than $1 trillion over the next decade.


As of now, analysts predict that the markets have not yet fully priced in the tax reform. Let us now discuss a few leveraged ETFs focused on providing exposure to the large-cap U.S. equity space.


ProShares UltraPro QQQ ETF TQQQ


This fund is a popular ETF that provides 3x leveraged exposure to large-cap U.S. companies.  However, it should be noted that the fund’s leverage is reset on a daily basis, which results in compounding of returns when held for multiple periods. Hence, this fund is appropriate only for sophisticated investors and not for those with a low risk appetite or investors eyeing a buy and hold strategy.


It has AUM of $2.1 billion and charges a fee of 95 basis points a year. From a sector look, the fund has high exposures to Information Technology, Consumer Discretionary and Health Care with 59.3%, 21.1% and 11.5% allocation, respectively (as of Sep 30, 2017). The fund’s top three holdings are Apple Inc AAPL, Microsoft Corp MSFT and Amazon.om Inc AMZN with 11.7%, 8.4% and 6.8% allocation, respectively (as of Sep 30, 2017). The fund has returned 120.8% in a year and 127.1% year to date (as of Dec 19, 2017). Zacks does not rank leveraged ETFs in view of their short-term performance objectives.


Direxion Daily S&P 500 Bull 3X Shares SPXL


This fund is a popular ETF that provides 3x leveraged exposure to large-cap U.S. companies.


It has AUM of $811.4 million and charges a fee of 106 basis points a year. From a sector look, the fund has high exposures to Information Technology, Financials and Health Care with 23.1%, 14.6% and 14.5% allocation, respectively (as of Sep 30, 2017). The fund’s top three holdings are Apple Inc, Alphabet Inc GOOGL and Microsoft Corp with 3.7%, 2.7% and 2.7% allocation, respectively (as of Sep 30, 2017). The fund has returned 61.7% in a year and 65.3% year to date (as of Dec 19, 2017).


ProShares Ultra Dow30 ETF DDM


This fund is a popular ETF that provides 2x leveraged exposure to large-cap U.S. companies.


It has AUM of $345.7 million and charges a fee of 95 basis points a year. From a sector look, the fund has high exposures to Industrials, Information Technology and Financials with 22.4%, 16.9% and 16.8% allocation, respectively (as of Sep 30, 2017). The fund’s top three holdings are Boeing Co BA, Goldman Sachs Group Inc GS and 3M Co MMM with 7.8%, 7.3% and 6.5% allocation, respectively (as of Sep 30, 2017). The fund has returned 57.1% in a year and 58.5% year to date (as of Dec 19, 2017).


Want key ETF info delivered straight to your inbox?

Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>