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8 High-Flying Leveraged ETFs YTD

Sweta Killa

Wall Street has been on a bull run so far this year with some wild swings lately. The U.S. stock market was caught in a web of worries in recent months triggered by the escalation in U.S.-China trade conflict, recession fears as indicated by the bond market and geopolitical tensions.

However, rising hopes of easing money policies globally as well as trade optimism continued to drive the stock market higher. The Fed has cut interest rates for the first time in more than a decade and is expected to do so further this month. Market expectations of a 25 basis-point rate cut are at 91.2% per the CME Group’s FedWatch tool. Lower interest rates will keep borrowing costs down, thereby resulting in higher consumer spending and an upswing in economic activities.

Last week, China’s central bank trimmed its reserve requirements for the seventh time since the start of 2018, reducing the amount of cash that banks are mandated to keep on reserve and thus freeing up as much as 900 billion yuan ($126 billion) in liquidity. The European Central Bank (ECB) is also expected to deploy further stimulus to shore up the 19-member eurozone economy, citing persistent low inflation and sluggish growth. Market participants are speculating that the ECB will cut its interest rate on bank overnight deposits for the first time since 2016 when it meets on Sep 12 (read: China ETFs Surge: Will the Upside Continue?).

All these fundamentals have led to 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 trend remains positive.

Below we highlighted eight leveraged equity ETFs that piled up more than 70% returns in the year-to-date time frame. These funds will continue to be investors’ darlings provided the sentiments remain bullish.

Direxion Daily Homebuilders & Supplies Bull 3X Shares NAIL — Up 139.2%

NAIL provides leveraged exposure to homebuilders and creates a three-time long position on the Dow Jones U.S. Select Home Construction Index. It charges an annual fee of 95 bps and trades in a lower average daily volume of about 54,000 shares. The fund has accumulated $46 million in its asset base (read: Homebuilder, REIT ETFs Booming on Falling Mortgage Rates).

Direxion Daily Semiconductor Bull 3x Shares SOXL — Up 115.8%

This ETF targets the semiconductor corner of the technology sector with 3x leveraged exposure to the PHLX Semiconductor Sector Index. It has amassed about $708.3 million in its asset base while charging 94 bps in fees per year. Volume is good as it exchanges nearly a million shares per day on average.

Direxion Daily Aerospace & Defense Bull 3X Shares DFEN — Up 96.4%

The fund creates three times leveraged long position in the Dow Jones U.S. Select Aerospace & Defense Index. It charges an annual fee of 95 bps and trades in a good average daily volume of about 58,000 shares. The fund has accumulated AUM of $54.3 million (read: 5 Leveraged/Inverse ETFs That Gained Double Digits in August).

Direxion Daily Technology Bull 3x Shares TECL — Up 96.1%

This ETF targets the technology sector with three times exposure to the Technology Select Sector Index. It has amassed about $776.2 million in its asset base and charges 95 bps in fees per year. Volume is good as it exchanges around 310,000 shares a day on average.

Direxion Daily Consumer Discretionary Bull 3X Shares WANT — Up 79%

This ETF seeks to offer three times exposure to the Consumer Discretionary Select Sector Index, charging 95 bps in annual fees. It has AUM of $5.1 million and average daily volume of 8,000 shares.

Direxion Daily Gold Miners Bull 3X Shares NUGT — Up 78.6%

NUGT provides three times exposure to the daily performance of the NYSE Arca Gold Miners Index. It charges 91 bps in annual fees and has gathered $1.3 billion in its asset base. Volume is heavy with around 9.8 million shares exchanged per day on average (read: August ETF Asset Report: Gold Tops).

Direxion Daily MSCI Real Estate Bull 3X Shares DRN — Up 72.5%

This product seeks to deliver three times the performance of MSCI US IMI Real Estate 25/50 Index. It has AUM of $50.1 million and average daily volume of around 41,000 shares. The ETF charges 95 bps in annual fees.

Direxion Daily Financial Bull 3x Shares FAS — Up 71.6%

This ETF provides three times exposure to the performance of the Russell 1000 Financial Services Index. The fund has amassed nearly $1.4 billion in its asset base and charges 95 bps in annual fees. It trades in average daily volume of nearly 957,000 shares (read: Bank ETFs Benefit From Steepening Yield Curve, But How Long?).

Bottom Line

While this strategy is highly beneficial for short-term traders, it could lead to huge losses compared to traditional funds in the 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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