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Top-Performing Leveraged/Inverse ETFs of Q1

Sweta Killa
Tilly's (TLYS) closed the most recent trading day at $16.18, moving -0.98% from the previous trading session.

The first quarter of 2018 was the most volatile quarter in recent years. After booming in January, the global stock market recorded the first quarterly loss in two years, suggesting that one of the longest ever-global bull run might end. The MSCI World Index, which was up 8% in January, suddenly evaporated and declined 1.7% in the first quarter.

Most of the decline came from the fallout of American stocks, which slipped into correction following interest rate jitters, fears of escalating import tariff dispute between the United States and China and a selloff in the tech sector. Additionally, fears of a global trade war and deepening turmoil in the White House added to the woes. This took investors away from equities and reduces holdings of U.S. stocks to the lowest in nearly two years, according to a Reuters poll.

The risk-off trade led to smooth trading in commodities that has put an end to the commodity bear market that began in 2011. Meanwhile, the fixed income space was out of investors’ favor thanks to the twin attacks of tax cut and a two-year budget deal. The two-year yields climbed 38.3 bps and 10-year yields jumped 33.2 bps (read: ETFs from Best & Worst Zones of Q1).

Given higher volatility, inverse or leveraged inverse ETFs gained immense popularity as investors embraced these products for big gains in a short span, though these involve a great deal of risk when compared to traditional products. These products either create an inverse long/short position or leveraged inverse long/short position in the underlying index through the use of swaps, options, future contracts and other financial instruments.

Below we have highlighted five such ETFs that have piled up huge returns in the first quarter of 2018. These funds will continue to be investors’ darlings provided the sentiments remain the same.

Direxion Daily Brazil Bull 3x Shares BRZU – Up 27.2%

Brazilian stocks were the biggest winners in the first quarter thanks to a turnaround in the economy, which is showing signs of life on lower interest rates and increased investments. The ETF creates a three times (3x or 300%) long position in the MSCI Brazil 25/50 Index. It has amassed about $154.2 million in its asset base while charges 95 bps in fees per year from investors. Volume is solid as it exchanges around 534,000 shares a day on average.

ProShares UltraPro 3x Crude Oil ETF OILU – Up 24.4%

Oil price rose on continued supply cuts by OPEC, Middle East tensions and the possibility of a further fall in Venezuelan output though record oil production in the United States, higher crude inventories and a firming dollar continued to weigh on the commodity. The ETF offers three times exposure to the daily performance of the Bloomberg WTI Crude Oil Subindex. The fund has amassed $16.2 million in its asset base and trades in solid average volume of 142,000 shares. It charges investors 95 bps in annual fees and expenses (read: 6 Reasons to Buy These Energy ETFs and Stocks Now).

Direxion Daily MSCI Real Estate Bear 3X Shares DRV – Up 24.3%

The real estate sector was a victim of speculation over the faster-than-expected rates hike and March rates hike given their higher sensitivity to rising interest rates. This product seeks to deliver three times inverse performance of MSCI US REIT Index, charging investors 95 bps in expense ratio. It has AUM of $14.4 million and an average daily volume of around 85,000 shares.

Direxion Daily Natural Gas Related Bear 3X Shares GASX – Up 20.3%

This product provides three times inverse exposure to the ISE-Revere Natural Gas Index. It has amassed $3.5 million in its asset base and trades in light volume of 20,000 shares a day on average. The ETF charges 95 bps in fees per year (read: 4 Inverse ETFs That Soared More Than 20% in February).

Direxion Daily Russia Bull 3X Shares RUSL – Up 16.2%

Russian stocks have been on a smooth ride buoyed by a rise in oil prices and lower interest rates despite the political ills. The ETF creates a three times long position in the MVIS Russia Index and has amassed about $140.1 million in its asset base while charging 94 bps in fees per year. Volume is moderate as it exchanges around 124,000 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 seesawing markets. Further, their performances 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 Inverse Equity ETFs here).

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