After logging big first-half gains, Wall Street has been caught in feeble trading in the second half. Worries over longer-than-expected higher interest rates and a weakening Chinese economy have been weighing on investors’ sentiment. Still, with just a week of trading left, the Nasdaq Composite Index is outperforming, gaining 26.2%. Meanwhile, the S&P 500 jumped 12.5% and Dow Jones Industrial is up 2.5%.
This has resulted in huge demand for leveraged ETFs as investors seek to register big gains in a short span.
We highlight a bunch of the best-performing leveraged equity ETFs from different corners of the market that are leaders in their respective segments. These include BMO REX MicroSectors FANG+ Index 3X Leveraged ETN FNGU, ProShares UltraPro QQQ TQQQ, Direxion Daily Homebuilders & Supplies Bull 3X Shares NAIL, Direxion Daily Consumer Discretionary Bull 3X Shares WANT and MicroSectors Travel 3x Leveraged ETN FLYU. These funds will continue to be investors’ darlings, at least in the near term, provided the sentiments remain bullish.
Most notably, the S&P 500 Index showed strong resilience, underscoring economic optimism and steady inflows. This is because the index has not dropped 1.5% or more in the last 100 consecutive sessions for the first time since 2018. While the index has experienced four declines of more than 1% since it peaked earlier this year, daily fluctuations have generally remained subdued, reminiscent of the stability seen in 2018 (read: S&P 500 Shows Resilience: 5 Top Stocks in the ETF).
The economy has withstood the worst of the Fed’s policy tightening. The central bank has raised interest rates 11 times to the highest level since 2001 over the course of 16 months. The Federal Reserve kept interest rates steady at a 22-year high in the range of 5.25% to 5.5% at the latest FOMC meeting but signaled one more hike this year.
Recent indicators suggest that economic activity has been expanding at a moderate pace, buoyed by robust consumer spending, strong job gains and a low unemployment rate. Notably, the economy has added 278,000 jobs per month so far this year and the unemployment rate of 3.8% is not far from a half-century low. Further, corporate earnings have improved. There has been a notable improvement in the earnings outlook in recent months, with positive revisions for several key sectors since the start of the third quarter.
Leveraged ETFs
Leveraged ETFs provide multiple exposures (2X or 3X) to the daily performance of the underlying index. These funds employ various investment strategies, such as the use of swaps, futures contracts and other derivative instruments to accomplish their objectives. Due to their compounding effect, investors can enjoy higher returns in a very short period of time, provided the trend remains a friend.
Since most of these ETFs seek to attain their goals on a daily basis, their performance could vary significantly from the performance of their underlying index or benchmark over a longer period when compared to a shorter period (such as weeks, months or years) due to their compounding effect (see: all Leveraged Equity ETFs here).
Investors should also note that leveraged ETFs involve a great deal of risk compared to traditional funds. They are often more costly and can be less tax-efficient, as they can see capital gains through the use of swaps and other derivative instruments.
BMO REX MicroSectors FANG+ Index 3X Leveraged ETN (FNGU) – Up 243.2%
BMO REX MicroSectors FANG+ Index 3X Leveraged ETN seeks to offer three times leveraged exposure to the NYSE FANG Index, charging 95 bps in annual fees. It has accumulated $2.1 billion in its asset base and trades in an average daily volume of 2 million shares.
ProShares UltraPro QQQ (TQQQ) – Up 108.5%
ProShares UltraPro QQQ offers three times the leveraged exposure to the NASDAQ-100 Index. It has amassed $17 billion in AUM and trades in a heavy volume of 86.5 million shares, on average. It charges 86 bps in annual fees.
Direxion Daily Homebuilders & Supplies Bull 3X Shares (NAIL) - Up 83%
Direxion Daily Homebuilders & Supplies Bull 3X Shares provides leveraged exposure to homebuilders. It creates a three-times-long position in the Dow Jones U.S. Select Home Construction Index, charging an annual fee of 98 bps. Direxion Daily Homebuilders & Supplies Bull 3X Shares trades in a good average daily volume of about 231,000 shares and has accumulated $201.3 million in its asset base (read: Will High Mortgage Rates Halt the Housing ETF Rally?).
Direxion Daily Consumer Discretionary Bull 3X Shares (WANT) – Up 65.6%
Direxion Daily Consumer Discretionary Bull 3X Shares offers leveraged exposure to the consumer discretionary sector. It provides three times exposure to the Consumer Discretionary Select Sector Index, charging 95 bps in annual fees. Direxion Daily Consumer Discretionary Bull 3X Shares has AUM of $32.7 million and an average daily volume of 37,000 shares.
MicroSectors Travel 3x Leveraged ETN (FLYU) – Up 104.5%
MicroSectors Travel 3x Leveraged ETN offers three times exposure to the performance of the MerQube MicroSectors U.S. Travel Index. It has accumulated $5 million in its asset base since its debut in late June last year and charges 95 bps in annual fees. MicroSectors Travel 3x Leveraged ETN trades in a paltry volume of 2,000 shares per day, on average.
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Get it free >>ProShares UltraPro QQQ (TQQQ): ETF Research Reports
Direxion Daily Homebuilders & Supplies Bull 3X Shares (NAIL): ETF Research Reports
MicroSectors FANG+ Index 3X Leveraged ETN (FNGU): ETF Research Reports
Direxion Daily Consumer Discretionary Bull 3X Shares (WANT): ETF Research Reports
MicroSectors Travel 3X Leveraged ETNs (FLYU): ETF Research Reports
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
