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Leveraged/Inverse ETFs That Gained Double-Digits Last Week

Sweta Killa

Last week was an eventful one characterized by a massive attack on Saudi oil, tension in the Middle East, a rate cut, and pessimism over U.S.-China trade talks.

Events Recap

A drone strike at the heart of Saudi Arabia’s oil production facilities in Abqaiq and Khurais led to the historic one-day gain in oil price and thus propelled energy sector. Secretary of State Michael Pompeo blamed Iran for the disruption while the allegation was rejected by Tehran. President Donald Trump said the United States is “locked and loaded depending on verification” that Iran staged the attack, raising the specter of a military response. Any retaliatory action against Iran would escalate tensions between the two countries.

Meanwhile, the Federal Reserve slashed interest rates for the second time since the financial crisis by 25 bps to 1.75-2% in its policy meeting to sustain the decade-long economic expansion (read: Sector ETFs, Stocks Set to Explode After Another Rate Cut).

The stock rally faded as Chinese trade delegation canceled visits to farms in Montana and Nebraska dampening optimism in trade talks. U.S. President Donald Trump said he wanted a complete trade deal, not just an agreement for China to buy more U.S. agricultural goods.

Leveraged/Inverse ETFs Riding High

Against this backdrop, investors rushed to leveraged or inverse leveraged ETFs 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.

However, these funds run the risk of huge losses compared to traditional funds in fluctuating or seesawing markets. Still, we have highlighted some leveraged/inverse ETF that piled up more than 10% last week though these involve a great deal of risk when compared to traditional products. This trend might continue at least in the near term provided the sentiments remain the same (see: all Leveraged Equity ETFs here).

Direxion Daily Junior Gold Miners Index Bull 3x Shares JNUG – Up 24.9%

This product provides 3x exposure to the daily performance of the MVIS Global Junior Gold Miners Index. It charges 89 bps in annual fees and has accumulated $932.3 million in its asset base. Volume is heavy, exchanging about 2.9 million in shares per day on average.

ProShares UltraPro 3x Crude Oil ETF OILU – Up 14.3%

This ETF offers three times exposure to the daily performance of the Bloomberg WTI Crude Oil Subindex. The fund has amassed $87.5 million in its asset base and charges investors 95 bps in annual fees. It trades in good volumes of about 956,000 shares per day (read: Profit From the Oil Rush With These ETFs).

Direxion Daily 20+ Year Treasury Bull 3X Shares TMF – Up 11.8%

With AUM of $205.8 million, this ETF offers three times exposure to the ICE U.S. Treasury 20+ Year Bond Index. It charges 94 bps in annual fees and trades in average daily volume of 914,000 shares.

VelocityShares 3x Inverse Natural Gas ETN DGAZ – Up 11%

This fund targets the natural gas segment of the commodity market through natural gas futures contracts. It seeks to deliver thrice the returns of the S&P GSCI Natural Gas Index Excess Return and has accumulated $228.4 million in its asset base. The product charges a higher fee of 1.65% per year and saw solid trading volume of 708,000 shares per day on average.

Direxion Daily FTSE China Bear 3x Shares YANG – Up 10.5%

This fund targets the Chinese stock market and provides three times the inverse return of the FTSE China 50 Index. It has AUM of around $83 million and sees good trading volume of 434,000 shares a day on average. Expense ratio comes in at 0.95% (read: ETFs in Focus as China's Economic Slowdown Persists).

Bottom Line

While this strategy is highly beneficial for short-term traders, it could lead to huge losses compared to traditional funds in fluctuating or seesawing markets. Further, their 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.

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