Leveraged ETFs That Soared More Than 50% in February

The U.S. stock market continued its strong rally in February with all three main indices gaining at least 3%, representing their second straight monthly gains. In fact, the back-to-back months of strong rally represents the best start to year since 1987. Optimism over U.S.-China trade deal has been the biggest catalyst (read: Wall Street's Best Start Since 1987: Top ETFs of Top Sectors).

The Federal Reserve also played an important role in driving market sentiments. The central bank said that it will be patient in raising rates, citing mounting risks to the U.S. economy, including slowdown in Chinese and European economies and waning stimulus from the 2018 tax cuts. Lower interest rates will keep the borrowing cost lower, thereby resulting in higher consumer spending and thus stepped-up economic activities.

Aside from American markets, China stocks are worth noting as the major indices raged to a bull market last month after President Donald Trump delayed his plan for raising tariff on $200 billion worth of Chinese goods. In fact, Chinese stocks have seen the world’s best trade in February.

The stimulus and a wide range of reforms implemented by the Chinese government to revitalize its economic growth raised the appeal for these stocks since the start of the year. Further, MSCI’s move to quadruple the weighting of Chinese big caps (A-shares) for a number of its indexes led to immense confidence in the Chinese stock market (read: Trump Postpones Tariff Deadline: 5 Hot China ETFs Set to Rally).

All these fundamentals have resulted 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 trend remains a friend.

Below we have highlighted some leveraged equity ETFs that have piled up more than 50% returns in February. These funds will continue to be investors’ darlings provided the sentiments remain the same.

Direxion Daily S&P Biotech Bull 3x Shares LABU – Up 79.2%

This fund creates a 3x leveraged long position in the S&P Biotechnology Select Industry Index. It charges an annual fee of 95 bps and trades in a heavy average daily volume of about 3.3 million shares. The fund has AUM of $654.9 million (read: Wall Street Caps Best Month in Decades: 6 Top Leveraged ETFs).

Direxion Daily Regional Banks Bull 3x Shares DPST – Up 75%

This fund seeks to deliver three times the returns of the S&P Regional Banks Select Industry Index, charging 95 bps in fees per year. It has accumulated $30.1 million in its asset base and trades in average daily volume of around 48,000 shares a day on average.

Direxion Daily Aerospace & Defense Bull 3X Shares DFEN – Up 73.1%

The fund creates a three times leveraged long position in the Dow Jones U.S. Select Aerospace & Defense Index. It charges an annual fee of 95 bps and trades in good average daily volume of more than 72,000 shares. The fund has accumulated AUM of $68.6 million (read: Why Aerospace & Defense ETFs are Soaring in 2019).

Direxion Daily Industrials Bull 3X Shares DUSL – Up 64.9%

This fund offers three times exposure to the daily performance of the Industrial Select Sector Index. It has accumulated $6.5 million in its asset base and the average daily volume is paltry at around 10,000 shares. Expense ratio comes in at 0.95%.

Direxion Daily Small Cap Bull 3X Shares TNA – Up 56.8%

This ETF provides three times the return of the daily performance of the Russell 2000 Index and exchanges around 3.9 million shares in hand on average per day. The fund has AUM of $874.9 million and charges 95 bps in fees and expenses (read: 5 Small-Cap ETFs & Stocks Beating Russell 2000).

Direxion Daily CSI 300 China A Share Bull 2X Shares CHAU – Up 55%

This product offers two times the exposure to the CSI 300 Index, charging investors 95 bps in annual fees. It has AUM of 112.8 million and average daily volume of 288,000 shares.

Daily Robotics, Artificial Intelligence & Automation Index Bull 3X Shares UBOT – Up 52.6%

This product seeks to deliver three times the daily performance of the Indxx Global Robotics and Artificial Intelligence Thematic Index. It has accumulated $20.9 million in its asset base and trades in average daily volume of 48,000 shares. The ETF charges 95 bps in annual fees (read: Best Sector of February and Its Top ETFs & Stocks).

Daily CSI China Internet Index Bull 2X Shares CWEB – Up 52.5%

This fund offers twice the leveraged exposure to the Chinese Internet market by tracking the CSI Overseas China Internet Index. It charges an annual fee of 95 bps and trades in a moderate average daily volume of about 97,000 shares. The fund has accumulated AUM of $73.1 million.

Direxion Daily Semiconductor Bull 3x Shares SOXL – Up 52.1%

This ETF targets the semiconductor corner of the technology sector with 3x leveraged exposure to the PHLX Semiconductor Sector Index. It has amassed about $587.5 million in its asset base while charging 95 bps in fees per year. Volume is good as it exchanges nearly 878,000 shares a day on average.

ProShares UltraPro MidCap400 UMDD - Up 50.9%

This fund seeks to create three times the daily performance of the S&P MidCap 400, charging investors 95 bps in annual fees. It has AUM of $26.5 million and average daily volume of 4,000 shares.

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 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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