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5 Leveraged ETFs That Will Move on Brexit Results

Zacks Equity Research

"Should the United Kingdom remain a member of the European Union or leave the European Union?" This is the question Britain will be voting on today, making it the biggest strategic decision in decades. Financial markets are on tenterhooks with only a few hours to go before the final results are declared (read: 6 ETFs Scaling New Heights Ahead of Brexit Vote).

Investors, hedge funds and investment banks are keeping an eye on private surveys due to a lack of exit polls. Thus, we could start seeing market movements even before the official results are released.

Brexit: Pros and Cons

There has been a steady rise in Eurosceptics over the past decade pressing for a referendum largely because of Europe’s migration crisis and continued Eurozone travails. Although chances of Brexit were slim a couple of years back, the perpetual problems in the EU have over time narrowed the polls. Polls have been mixed over the last couple of months, but the latest polls released last weekend show strong chances for remaining.

Many market participants believe a "Brexit" would lead to a weaker currency owing to worries about Britain's £229 billion annual trade with the EU, which could suffer if new trade barriers are raised. One of the major advantages of being a part of EU is free trade between member nations, which makes exporting goods to other EU countries easier and cheaper for British companies. Thus, Brexit could have a negative impact on Britain’s GDP. Lower GDP growth and tougher export conditions would hit several sectors like retail and financial services among others and therefore have an unfavorable impact on British equities. Warnings have been flowing in from several quarters regarding the negative impact of Brexit on the global market. In fact, Federal Reserve Chair Janet Yellen sees it as having "significant economic repercussions" (read: 6 Sector ETFs Threatened by Brexit Uncertainty).

On the other side of the coin, the country could form deeper ties with other countries outside the EU. However, it can’t be exactly predicted what would happen if Britain exits the EU, as there has been no precedence.

Additionally, a Brexit could address the blazing immigrant issue. Currently, UK has no control over accepting migrants as citizens of EU members have permission to reside in any member country.

Market Impact

Whether the UK will ultimately choose Brexit or Bremain remains to be seen. But one thing is for sure, the market is going to move significantly one way or another. The volatility ETN iPath S&P 500 VIX ST Futures ETN VXX was up over 16.4% over the last ten days as of June 22 (read: Market Fears Brexit: Volatility ETFs Take Full Advantage).

In this scenario, let’s look at certain leveraged or inverse ETFs that are certain to move on the Brexit decision. Leveraged or inverse ETFs 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, futures 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 erratic markets. Further, their performance 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). Despite this drawback, investors jump into these products for quick turns (see: all Leveraged Equity ETFs here).

In Case of Brexit

Daily Gold Miners Bull 3x shares NUGT

Gold shines in times of uncertainty. The weakness in the global financial markets has helped gold to recover its sheen in 2016. A tumultuous global economy including overall growth issues and Brexit fears along with the global oil market turbulence has lifted safe-haven demand. A Brexit would create a surge in demand for this yellow metal.

In this case, NUGT seeking to deliver thrice the daily performance of the NYSE Arca Gold Miners Index, which consists of firms that operate globally in both developed and emerging markets, and are involved primarily in the exploration and production of gold, is a good choice. It is rich in AUM of $1.3 billion and saw solid average trading volume of 8.5 million shares. Expense ratio comes in at 0.94%. The fund has delivered whopping returns of 311.6% year to date.

ProShares Ultra VIX Short-Term Futures ETF UVXY

This is an attractive play in case of a yes vote considering that it can send shock waves across the global economy including the U.S. which will not be immune to its ripple effect. As per a report by FIS, if the vote is in favor of a Brexit, it could lead the S&P 500 to fall 5%.
 
ProShares Ultra VIX Short-Term Futures ETF provides two times exposure to the daily performance of the S&P 500 VIX Short-Term Futures Index. It has amassed about $852.4 million in its asset base while charges 95 bps in fees per year from investors. It has solid average trading volume of 36.6 million shares. The fund has delivered negative returns of 54.4% in the year-to-date timeframe (read: 10 Highly Traded Leveraged/Inverse ETFs of 2Q).

In Case of Bremain

ProShares UltraShort 20+ Year Treasury TBT

Demand for safe-haven assets peaked amid an uncertain global economic outlook and growing volatility across many asset classes. U.S. treasury bonds benefited from this trend as yields on 10-year Treasury notes fell to new lows. Additionally, the Fed’s dovish stance on policy tightening has given further boost to these assets. The latest boost to treasuries came on the prospect of a Brexit. The market stands for a correction in case of a Bremain. Investors can benefit from this correction through exposure to ProShares UltraShort 20+ Year Treasury.

The fund provides two times exposure to the daily performance of the Barclays U.S. 20+ Year Treasury Bond Index. It has amassed about $2 billion in its asset base while charges 93 bps in fees per year from investors. It has average trading volume of 1.8 million shares. The fund has delivered negative returns of 22.1% in the year-to-date timeframe.

Direxion Daily Financial Bull 3x Shares FAS

Earlier this month, the Fed announced its decision not to raise interest rates and hinted that further increases would most likely occur at a slower pace than expected previously. Yellen even stated that a Brexit vote was one of the factors behind the Fed holding rates constant.

Thus Direxion Daily Financial Bull 3x Shares is a good play in case Britain elects to stay, which could remove one of the hurdles in Fed’s way to increase rates. A hike in interest rates would benefit the financial sector and thus favor FAS.

This ETF seeks to make large profits from a bullish trend in the financial sector. It provides three times exposure to the performance of the Russell 1000 Financial Services Index. The fund has amassed nearly $1.1 billion in its asset base and trades in average volume of 5.2 million shares. It charges 95 bps in annual fees and has shed about 11.2% in the year-to-date timeframe.

ProShares UltraShort Yen YCS

Apart from gold and treasury bonds, another classic safe-haven asset is the Japanese currency, yen. Earlier this week, the yen traded near a 22-month high against the greenback to reflect Brexit woes. It is widely believed to be the biggest gainer among Asian currencies in the event of a Brexit. Thus, a contrary case would boost the ProShares UltraShort Yen.

The product looks to track the daily investment results, before fees and expenses that correspond to twice (200%) the inverse exposure of the U.S. dollar price of yen. The fund has amassed about $193.6 million so far and trades in volumes of about 80,000 shares a day. The fund charges 95 bps in fees and declined about 25.7% in the year-to-date frame (read: Can Yen ETF Keep Up its Momentum?).

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