Not all ETFs sacrifice performance for diversification and safety. In fact, the Direxion Daily Natural Gas R Bull 3X (GASL), the Direxion Daily S&P Biotech Bull 3X (LABU) and the Direxion Daily Gold Miners Bull 3X (NUGT) are all up more than 30% in the past month alone.
Each of these unique ETFs has blown the S&P 500 returns out of the water lately. How are they doing it? Here’s a look at what each ETF brings to the table.
Direxion Daily Natural Gas R Bull 3X (GASL)
The major trick up this ETF’s sleeve is leverage. As its name implies, the GASL tracks the natural gas market. However, it is designed to track 3X, or 300%, the performance of the ISE-Revere Natural Gas Index.
Natural gas prices have stabilized in recent weeks, and natural gas stocks and ETFs have surged. The United States Natural Gas Fund (UNG) is up 2% in the last month. However, because of its leverage, the GASL is up 72% in that same period.
GASL’s top holdings, which reset daily, are swap agreements, which carry counterparty risk. These swap agreements are how the ETF achieves its intended leverage. The daily rebalancing of the fund is the reason why daily levered funds such as these typically have a high expense ratio and tend to underperform in the long run.
It could be easy to look at the GASL’s recent performance and get visions of retiring a millionaire by buying now and holding, but leverage swings both ways. Despite the huge gains so far this year, GASL is down an incredible 99.8% (you read that right) in the past year!
Direxion Daily S&P Biotech Bull 3X (LABU)
Another Direxion levered ETF, the LABU, is designed to provide daily 3X levered exposure to the S&P 500 Biotechnology Select Industry Index. Like the GASL, the LABU achieves its leverage because its top holdings are derivatives and get rebalanced at the end of each day. Like many levered ETFs, the LABU is designed to work best as a short-term trading instrument.
The ETF’s 36% one-month gain seems impressive until you look at the longer-term picture. LABU is down 78% since inception 11 months ago.
For a more diversified long-term bet on the biotech sector, consider the unlevered iShares NASDAQ Biotechnology Index (IBB), which is up an impressive 9.5% in the past month.
Direxion Daily Gold Miners Bull 3X (NUGT)
The final ETF that has been paying off huge for traders in the last month is the NUGT, which is a 3X levered bet on the NYSE Arca Gold Miners Index. Yet another short-term trading instrument, the NUGT tends to underperform when held for longer periods of time.
The NUGT has surged 78% in the past month as gold prices have climbed 19% so far in 2016. However, over the past two years, the NUGT has delivered a -73% return compared to a roughly 3% decline in gold spot prices.
For a longer-term diversified play on gold, the SPDR Gold Trust ETF (GLD) is a much smarter choice.
Disclosure: As of this writing, Wayne Duggan had no positions in any of the stocks mentioned.
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