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S&P 500 Posts Best Week in 7 Years: 5 Best Leveraged ETFs

The S&P 500 and Nasdaq Composite Index logged in the best week since 2011, while the Dow Jones posted its best week since November 2016 on optimism over the U.S.-China trade truce and a dovish Fed view. This marks a sharp reversal from a week ago, when the S&P 500 slipped to correction territory by declining 10% from its latest peak.  

Last week, Fed Chair Powell said that interest rates were "just below" the level that would be neutral for the economy — meaning they would neither speed up nor slow down economic growth. This is in contrast to his October remarks that the rate was “a long way” from neutral -which led to worries that the rate increases would crimp growth. As such, the dovish view has charged up the bulls.

Further, the subsequent minutes from the central bank's latest meeting suggests that the Fed will likely raise rates this month and signals 'flexible' approach in 2019. All these comments indicate that the central bank may pause hikes next year (read: Odds for December Fed Rate Hike Pretty High: ETFs to Invest).

At the G-20 summit in Buenos Aires, Trump held off new tariffs of 25% on $200 billion worth of Chinese goods for 90 days, while Xi Jinping agreed to boost purchases of U.S. agricultural goods to reduce trade imbalance between the two countries. This has eased fears of escalation in long-standing trade disputes between the two countries.

The bullish trend is likely to continue and resulted in huge demand for leveraged ETFs last week as investors seek to register big gains in a short span. These products create a multiple exposure (i.e. 2x or 3x) exposure to the daily performance of the underlying index by employing various investment strategies such as swaps, futures contracts and other derivative instruments (read: Leveraged ETFs: How Do They Work and What's Hot Now?).

Below we have highlighted five U.S.-focused ETFs that crushed the market last week with abnormal returns in a short period and will likely continue to do so.

BMO REX MicroSectors FANG+ Index 3X Leveraged ETN FNGU – Up 20.4%

This note seeks to offer three times leveraged exposure to the NYSE FANG Index, which is an equal-dollar weighted index targeting the highly-traded growth stocks of next generation technology and tech-enabled companies in the technology and consumer discretionary sectors. The ETN debuted in late January and has accumulated $118 million since then. It charges 95 bps in annual fees and trades in average daily volume of 118,000 shares.

ProShares UltraPro QQQ TQQQ    – Up 19.6%

This ETF provides three times 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 $4.3 billion and average daily volume of 12.5 million shares. TQQQ charges 95 bps in fees per year.

Direxion Daily Technology Bull 3x Shares TECL – Up 18.7%

This ETF targets the technology sector with three times leveraged exposure to the Technology Select Sector Index. It has amassed about $626.7 million in its asset base and charges 95 bps in fees per year. Volume is good as it exchanges around 220,000 shares a day on average (read: 5 Low P/E Tech ETFs for Investors).

Direxion Daily Healthcare Bull 3X Shares CURE – Up 18.3%

This fund creates three times leveraged long position in the Health Care Select Sector Index while charging 95 bps in fees a year. It has $187.1 million in AUM and trades in volumes of 121,000 shares on average.

ProShares UltraPro Nasdaq Biotechnology ETF UBIO – Up 16.9%

This ETF seeks to deliver three times the daily performance of the NASDAQ Biotechnology Index, charging 95 bps in fees per year. UBIO has accumulated $34.2 million in its asset base and trades in a lower volume of around 51,000 shares a day on average.

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 seesaw markets. Further, their performance could vary significantly from the actual performance of the underlying index over a longer period when compared to the shorter period (such as, weeks or months) due to the compounding effect (see: all Leveraged Equity ETFs here).

Still, for ETF investors who are bullish on 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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DIR-TEC BULL3X (TECL): ETF Research Reports
PRO-ULT QQQ (TQQQ): ETF Research Reports
PRO-ULT ND BI (UBIO): ETF Research Reports
DIRX-D HC BL3X (CURE): ETF Research Reports
BMO-RM FG I3XL (FNGU): ETF Research Reports
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Zacks Investment Research
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