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How Volatility Affects 2 Popular Leveraged ETFs

ETF Professor

July was an excellent month for select leveraged exchange-traded funds, including some popular leveraged sector ETFs such as the Direxion Daily S&P Biotech Bull 3x Shares (NYSE: LABU) and the Direxion Daily Junior Gold Miners Index Bull 3x Shares (Direxion Shares Exchange Traded Fund Trust (NYSE: JNUG)).

LABU, which is designed to deliver triple the daily returns of the S&P Biotechnology Select Industry Index, surged nearly 49 percent last month. JNUG, which seeks to deliver triple the daily returns of the MVIS Global Junior Gold Miners Index, was not too shabby either with a July gain of 46.5 percent.

Leveraged ETFs And Volatility

Many investors believe volatility is negative, but volatility can be a friend, albeit temporarily, to leveraged ETFs. Think of positive volatility with leveraged ETFs as adding more juice to an already high-octane trade. However, those that are new to leveraged ETFs should take some time to fully understand how volatility affects these products when moving past holding periods of a day or just a few days.

Related Link: An Overlooked Alternative For Low Volatility Fans

JNUG's underlying “index gained 16.81 percent for the month and JNUG returned 46.49 percent. JNUG’s cumulative performance for the month was 3.94 percent; less than three times the performance of the benchmark’s cumulative return of 50.43 percent. In this instance, the relatively high volatility had a negative impact on the returns of JNUG over the period,” said Direxion in a recent note.

Non-leveraged gold miners ETFs are often among the most volatile industry and sector ETFs, so it is not surprising that JNUG is a volatile instrument. Over the past month, JNUG has been Direxion's most volatile leveraged bull ETF followed by that ETF's large-cap counterpart, the Direxion Daily Gold Miners Index Bull 3X Shares (Direxion Shares Exchange Traded Fund Trust (NYSE: NUGT)), according to issuer data.

During July, LABU saw volatility work in its favor.

“Not only was the volatility of the S&P Biotechnology Select Industry Index lower than that of the MVIS Global Junior Gold Miners Index; it also decreased consistently for the month. The 30-day volatility averaged 38.9 percent, 7 percent less than that of the MVIS Global Junior Gold Miners Index. As a result, LABU benefited from positive compounding and returned 48.76 percent for the month; which is 4.72 percent greater than three times the cumulative return of the benchmark; 44.04 percent,” added Direxion.

Not The End Of The Story...

Of course, volatility cuts both ways. JNUG was indeed volatile last Friday. The ETF entered the day as Direxion's second-best bullish leveraged ETF on a month-to-date basis, but plunged 10.3 percent as traders ditched gold on the back of the July jobs report.

Now up nearly 10 percent month-to-date, LABU is Direxion's second-best leveraged bull ETF month-to-date.

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