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5 Leveraged/Inverse ETFs Soaring in December

Heightened volatility and uncertainty has raised the appeal for leveraged and inverse leveraged ETFs. While U.S.-China trade tensions, flattening yield curve, political instability in Europe and global growth worries have recently resulted in market gyrations, bouts of upbeat economic data as well as holiday optimism are acting as major catalysts to the stocks.

Against such a backdrop, investors are rushing to the products in this space 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 (read: How To Profit From Market Volatility Using Inverse & Leveraged ETFs).

However, these funds run the risk of huge losses compared to traditional funds in fluctuating or seesawing markets. Further, their performances 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).

Still, we have highlighted five leveraged/inverse products that are seeing huge gains this month though these involve a great deal of risk when compared to traditional products. This trend might continue at least for the near term if the sentiments remain the same (read: Leveraged ETFs: How Do They Work and What's Hot Now?).

VelocityShares Daily 2x VIX Short Term ETN TVIX – Up 31.6%

As volatility has been at the forefront this month, leveraged volatility products are outperforming. 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 12 million shares and AUM of about $549.6 million. Expense ratio came in much higher at 1.65%. However, investors should note that volatility products have been terrible performers over the medium and long term due to a contangoed market and a steep roll cost.

Direxion Daily Regional Banks Bear 3x Shares WDRW – Up 29.7%

Banking stocks have been hammered badly as the yield curve has inverted, meaning that longer-dated debt yields are falling faster than their shorter-dated counterparts. This situation is hampering earnings of banks. As such, WDRW seeks to deliver thrice the inverse return of the S&P Regional Banks Select Industry Index, charging 95 bps in fees per year. WDRW has accumulated $3.9 million in its asset base and trades in a paltry volume of around 2,000 shares a day on average.

ProShares UltraPro Short Financial Select Sector ETF FINZ – Up 26%

Not only banks but also the broad financial sector has been on a tumultuous ride. FINZ provides three times inverse exposure to the S&P Financial Select Sector Index. It charges 95 bps per year, while the average daily trading volume is paltry at 11,000 shares. It has amassed $1.4 million in AUM.

Direxion Daily S&P Oil & Gas Exp. & Prod. Bear 3X Shares DRIP – Up 20.8%

Although oil price recovered from its lowest level in recent sessions following additional output cut from the OPEC and its allies as well as the shutdown of Libya’s biggest crude field, DRIP has lost more than 20% so far this month. This fund seeks three times inverse exposure of the performance of the S&P Oil & Gas Exploration & Production Select Industry Index. DRIP has accumulated $38.7 million in its asset base and trades in solid volume of around 4.9 million shares a day on average. The fund charges 95 bps in annual fees (read: Best Leveraged/Inverse ETFs of November).

ProShares UltraPro Short MidCap400 ETF SMDD – Up 18.6%

This product provides three times inverse exposure to the S&P MidCap 400, charging 95 bps in fees and expenses. It has been able to manage $2.5 million in its asset base with heavy average daily volume of 4,000 shares.

Bottom Line

Investors should note that these products are suitable only for short-term traders as these are rebalanced on a daily basis. Further, liquidity can be the biggest problem for these products that could make them more expensive than what they appear (see: all the Inverse Equity ETFs here).

Still, ETF investors seeking to tap abrupt movements can go long or short in the near term.

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