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5 Leveraged ETFs That Gained More Than 20% in October

Sweta Killa

Trade optimism and global easing policies drove the stock market last month. Notably, the world stock market as represented by MSCI world equity index, which tracks shares in 47 countries, rose to its highest level in over 20 months.

The most notable development in October was the announcement of the “phase one” of trade deal, wherein Washington suspended the tariff hike worth $250 billion on Chinese goods set to go into effect in mid-October and Beijing agreed to buy $40-$50 billion in U.S. farm products. However, trade uncertainty lingers as per a recent Bloomberg report, which cast doubts over a comprehensive long-term trade deal between Washington and Beijing.

Meanwhile, the Fed cut rates for the third time this year by 25 bps to help sustain U.S. growth in the face of slowdown elsewhere in the world. Additionally, better-than-expected corporate earnings fueled a rally of late (read: 5 Best Sector ETFs of October With Double-Digit Returns).

This is especially true as Q3 results and earnings outlook have not taken as much of a hit as widely feared following growing evidence of a global economic slowdown. Total earnings for  341 S&P members that reported Q3 results through Oct 31 are down 0.6% on 4.9% higher revenues, with 73.9% beating EPS estimates and 60.1% beating revenue estimates. While earnings growth is less than what this group of companies witnessed in recent periods, revenue growth is actually in line. The proportion of these companies beating EPS and revenue estimates is also in the historical range.

All these fundamentals have 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.

Below we have highlighted five leveraged equity ETFs that piled up more than 20% returns in October and could continue to be investors’ darlings.

MicroSectors U.S. Big Banks Index 3X Leveraged ETN BNKU – Up 30.2%

BNKU seeks to offer three times exposure to the Solactive MicroSectors U.S. Big Banks Index. The ETN has accumulated $31.3 million in its asset base. It charges 95 bps in annual fees and trades in average daily volume of under 1,000 shares.

Direxion Daily Pharmaceutical & Medical Bull 3X Shares PILL – Up 29%

This product targets the pharma corner of the broad healthcare sector and seeks to deliver thrice the daily performance of the S&P Pharmaceuticals Select Industry Index. It has managed $9.4 million in AUM and trades in a light average daily volume of 36,000 shares. Expense ratio comes in at 0.95% (read: Healthcare ETFs Win in October: Here's Why).

ProShares UltraPro Nasdaq Biotechnology ETF UBIO – Up 27.5%

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 $26 million in its asset base and trades in a lower volume of around 38,000 shares a day on average.

Direxion Daily Brazil Bull 3x Shares BRZU – Up 24.3%

BRZU creates a three times long position in the MSCI Brazil 25/50 Index. It has amassed about $439.4 million in its asset base, while charging 95 bps in fees per year from investors. Volume is solid as it exchanges around 2.4 million shares a day on average.

Direxion Daily Russia Bull 3X Shares RUSL – Up 22%

This ETF creates three times long position in the MVIS Russia Index and has amassed about $85.4 million in its asset base while charging 90 bps in fees per year. Volume is lower as it exchanges around 84,000 shares a day on average (read: Top and Flop ETFs of October).

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, the ETFs’ 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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