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Why You Should Bet on Leveraged ETFs in November

Sweta Killa

November has been among the best months for markets over the past decade with seasonality playing a vital role. In fact, it marks the start of the best six months for the Dow Jones and the S&P 500, and the best eight-month period for the Nasdaq, according to Almanac, citing “fourth-quarter cash inflows from institutions.”

November has been the third-best month for the Dow since 1950 and the Nasdaq since 1971. The month has also been the second best for the S&P 500 for nearly 70 years and the small-capitalization Russell 2000 Index since 1979. According to a CNBC analysis by Kensho, all the three major indices have traded positively 80% of the time in November since 2009. On average, the S&P 500 gained 1.8%, while the Nasdaq was up more than 1.6% and the Dow Jones Industrial Average rose 2%. Per CFRA, November has been the third-best month for the S&P 500, with 1.3% gain, on average, two-third of the time since World War II.

The bullish trend seems more likely this year with positive momentum built up in the space. Better-than-expected earnings, easing policies, renewed trade deal optimism and a solid job report have boosted investors’ sentiment. Further, the holiday season fervor will add to the strength (read: 4 Sectors Set to Surge in November: ETFs & Stocks to Buy).

The National Retail Federation expects holiday retail sales, excluding automobile dealers, gasoline stations and restaurants, during November and December to increase 3.8-4.2% from the year-ago level to a $727.9-$730.7 billion. This is slightly higher than the average holiday sales increase of 3.7% over the previous five years.

All these combinations will result in huge demand for leveraged ETFs as investors seek to register big gains in a short span. Leveraged funds 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 very short period of time, provided the market remains bullish.

Though there are several leveraged ETFs in the space that investors could bet on for this month, we have presented some that could fetch market-beating returns.

Direxion Daily Retail Bull 3X Shares RETL

This ETF offers three times leveraged exposure to the S&P Retail Select Industry Index. The product has amassed about $14.1 million in its asset base, while charging 95 bps in fees per year. Volume is lower as it exchanges around 33,000 shares a day on average (read: Is Holiday Season Frenzy Fading for Retail ETFs?).

Direxion Daily Industrials Bull 3X Shares DUSL

Cyclical stocks like industrials tend to benefit the most. This fund offers three times exposure to the daily performance of the Industrial Select Sector Index. It has accumulated $3.6 million in its asset base. Average daily volume is paltry at around 4,000 shares. Expense ratio comes in at 0.95%.

Direxion Daily Semiconductor Bull 3x Shares SOXL

The technology sector will also benefit, especially semiconductors as this corner has been beaten down badly by the U.S.-China trade war. SOXL offers 3x leveraged exposure to the PHLX Semiconductor Sector Index. It has amassed about $711.8 million in its asset base while charging 94 bps in fees per year. Volume is good as it exchanges nearly 997,000 shares a day on average (read: Time to Buy the Dip in Semiconductor ETFs?).

BMO REX MicroSectors FANG+ Index 3X Leveraged ETN FNGU

This note seeks to offer three times leveraged exposure to the NYSE FANG Index, charging 95 bps in annual fees. The ETN has accumulated $136.5 million in its asset base and trades in average daily volume of 153,000 shares.

Direxion Daily Transportation Bull 3X Shares TPOR

With increased activities in the economy during the month, the transport sector will get a boost. TPOR targets this sector and seeks to deliver thrice the daily performance of the Dow Jones Transportation Average. The product has AUM of $4.3 million and charges 95 bps in fees and expenses. It trades in lower volumes of about 15,000 shares per day.

Direxion Daily S&P 500 Bull 3x Shares SPXL

This fund creates three times long position on the S&P 500 Index with expense ratio of 0.95%. It has AUM of $983.1 million and is liquid with average daily volume of nearly 4.2 million shares (read: S&P 500 at Record High: 6 ETF Winners of Last Week).

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, the ETFs’ 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 (see: all the Leveraged Equity ETFs here).

Still, for ETF investors who are bullish on U.S. 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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