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7 Leveraged ETFs on Tap for Big Gains

Sweta Killa

After a volatile start to the second quarter, the stock market gathered momentum in recent weeks with the S&P 500 hitting a record high on Friday. The trend is likely to continue thanks to robust job data and the outcome of the French election.

The U.S. economy added 211,000 jobs in April, more than double of what was recorded in March while the unemployment rate fell from 4.5% to 4.4%, the lowest level in more than a decade. Wages grew seven cents per hour to an annualized rate of 2.5%. All these signal renewed confidence in the economy and that the labor market is running at full capacity.

The centrist candidate Emmanuel Macron got a landslide victory in the French presidential election, defeating the far-right candidate Marine Le Pen, who threatened to take France out of the European Union. Macron won with 65.1% votes against 34.9% for Le Pen to become the youngest president in the history of France. The landslide victory has erased a wave of populist sentiment sweeping through Europe, which was the big geopolitical risk weighing on investors’ mind for months, and set the stage for European stocks to outperform (read: 5 European ETFs Soaring on French Election Results).

Additionally, a rebound in oil prices and solid corporate earnings will add to the strength. This is because the OPEC is seeking to extend its six-month production cut agreement that began in January to the second half of this year and possibly beyond that at a meeting on May 25 in Vienna. The pact is helping to bring the oil market closer to strike a balance between supply and demand though rising U.S. output and higher stockpiles are keeping them at check. As such, hopes of an extension have boosted confidence in the energy sector.  

Further, the Q1 earnings season has been strong with earnings and revenue growth as well as beat ratios tracking above the historical periods. Total earnings for the S&P 500 index are expected to be up 12.7% on 6.2% revenue growth, per the latest Earnings Preview and the strongest since 2011, according to Thomson Reuters.

Given this, investors’ seek to capitalize on this opportune moment for big gains in a short span. For them, a leveraged play could be an excellent idea as these could lead to huge gains in a very short timeframe when compared with simple products. Leveraged ETFs 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 trend remains a friend (read: Leveraged ETFs: How Are They Built and What's Hot Now?).

Below we highlight several products that could garner huge profits from the current bullish sentiments in a short span.

Direxion Daily S&P 500 Bull 3x Shares SPXL

This fund creates a three times (3x) leveraged long position in the S&P 500 Index while charging 95 bps in fees a year. It has $585 million in AUM and trades in heavy volume of 3.2 million shares on average.

Direxion Daily Homebuilders & Supplies Bull 3X Shares NAIL

The fund creates a three times leveraged long position in the Dow Jones U.S. Select Home Construction Index. It charges an annual fee of 95 bps and trades in a light average daily volume of about 6,000 shares. The fund has accumulated AUM of $7.9 million (read: Top Ranked Housing ETFs for a Hot Spring Selling Season).

Direxion Daily Energy Bull 3x Shares ERX

This fund creates a three times leveraged long position in the Energy Select Sector Index while charging 95 bps in fees a year. It is a popular and liquid option in the energy leveraged space, with AUM of $496.76 million and average trading volume of 2.3 million shares.

Credit Suisse FI Large Cap Growth Enhanced ETN FLGE

This is an ETN option providing two times (2x) leveraged return of the Russell 1000 Growth Index performance. It is a popular option in the large cap space with AUM of $1.1 billion but illiquid with average daily volume of 11,000 shares. FLGE charges 0.85% in expense ratio.

Barclays ETN+ FI Enhanced Europe 50 ETN FEEU

This is an ETN option providing leveraged exposure of two times (2x) the performance of the Stoxx Europe 50 USD Gross Return Index. The benchmark comprises 50 European blue-chip companies selected from within the Stoxx Europe 600 Index. The note has been able to manage assets of $472.1 million but trades in a light volume of 7,000 shares a day. It charges 76 bps in annual fees (read: Do Europe ETFs Have More Upside?).

Direxion Daily MSCI European Financials Bull 2X Shares EUFL

This ETF seeks to deliver two times the daily performance of the MSCI Europe Financials Index. The product has AUM of $4.2 million and charges 80 bps in fees and expenses. It trades in meager volumes of nearly 1,000 shares per day.

Direxion Daily MSCI Developed Markets Bull 3X Shares DZK

This fund delivers three times exposure to the daily performance of the MSCI EAFE Index. It has accumulated $25.2 million in its asset base and trades in small volume of around 4,000 shares per day on average. Expense ratio comes in at 0.95%.   

Bottom Line

As a caveat, investors should note that these products are extremely volatile and suitable only for short-term traders. Additionally, the daily rebalancing – when combined with leverage – may make these products deviate significantly from the expected long-term performance figures (see: all the Leveraged Equity ETFs here).

Still, for ETF investors who are bullish on the near term, either of the above products can be 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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