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Leveraged ETFs to Play the Second-Largest Bull Market

Sweta Killa
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Braving all economic and political challenges, the U.S. stock market is scaling new highs, indicating that the second-largest bull run still has legs. The rally has been broad based with various sectors and industries on an uptrend (read: 6 Sector ETFs Must Buys Now).

Strong corporate earnings, still-low interest rates, and improving health of economies around the world are acting as tailwinds to the stock market. The economy has been on a solid growth path buoyed by an impressive labor market, increase in wages, higher consumer spending and rising consumer confidence. Further, a weaker dollar, a rebound in oil price and hopes of tax reform are adding to the strength. Moreover, the Fed’s hawkish stance signals a strengthening economy, which will fuel further growth in the stock market.

The bullish trend is further justified by the Bloomberg report, which shows that Americans are bullish on the U.S. stock market. This is especially true as the University of Michigan’s preliminary survey of consumer sentiment for September reveals that 65% of Americans believe the stock market will appreciate this year, representing the highest probability in record dating back to 2002.     

If this wasn’t enough, long-time bull finance professor, Jeremy Siegel, expects stocks to rally 10% in the last 101 days of the year courtesy of Trump effect, especially tax reforms. This is the second time in less than 12 months that Siegel made a bold market call. The professor in the final weeks of 2016 forecasted that the blue chip index will hit the 20,000 milestone for the first time and his expectation came true on January 25 (read: Top-Ranked ETFs That More Than Doubled the S&P 500 This Year).

Given this, investors’ seek to capitalize on opportune moments 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 time frame 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 jiffy, provided the trend remains a friend.

Below, we have highlighted six ETFs from various corners of the space that crushed the market this year with abnormal returns piled up in a short period. These funds will remain investors’ darlings heading into the final quarter.

Direxion Daily S&P Biotech Bull 3x Shares LABU

This fund creates a 3x leveraged long position in the S&P Biotechnology Select Industry Index. It charges an annual fee of 95 bps and trades in a heavy average daily volume of about 1.4 million shares. The fund has accumulated AUM of $304.1 million and surged about 148.6% so far this year (read: Best Leveraged ETFs of First Half of 2017).

Direxion Daily Homebuilders & Supplies Bull 3X Shares NAIL

The fund provides 3x exposure to 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 10,000 shares. The fund has accumulated AUM of $12.2 million and gained 92.3% in the year-to-date time frame (read: After Raft of Weak Data, What Lies Ahead for Housing ETFs?).

Direxion Daily Semiconductor Bull 3x Shares SOXL

This ETF targets the semiconductor corner of the technology sector with 3x exposure to the PHLX Semiconductor Sector Index. It has amassed about $344.7 million in its asset base while charges 95 bps in fees per year. Volume is good as it exchanges nearly 446,000 shares a day on average. The fund is up 91.4% so far this year.

ProShares UltraPro QQQ TQQQ

This ETF provides 3x the returns of the daily performance of the NASDAQ-100 Index. It is one of the popular and liquid options in the leveraged large cap space with AUM of $2 billion and average daily volume of 3.6 million shares. TQQQ charges 95 bps in fees per year from investors and has gained 75.9% this year.

Direxion Daily Technology Bull 3x Shares TECL

This ETF targets the broad technology sector with 3x leveraged exposure to the Technology Select Sector Index. It has amassed about $343.4 million in its asset base while charges 95 bps in fees per year from investors. Volume is good as it exchanges around 144,000 shares a day on average. The fund has surged 74.7% this year (read: 5 Ways to Play Unstoppable Tech Rally with ETFs).

Direxion Daily Healthcare Bull 3X Shares CURE

This fund creates 3x leveraged long position in the Health Care Select Sector Index while charging 95 bps in fees a year. It has $149.3 million in AUM and trades in volumes of 90,000 shares on average. The ETF has gained 64.1% this year.

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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