In the world of exchange-traded funds, few products are as seductive as leveraged ETFs. I’ll use a basic example to illustrate. The Direxion Daily S&P 500 Bull 3X Shares (NYSEARCA:SPXL) is designed to deliver triple the daily returns of the S&P 500.
So if the S&P 500 rises by 1% on a particular day, SPXL should jump 3%. The integral words in those last two sentences are “day” and “daily,” meaning leveraged ETFs, including the inverse products are best used as short-term instruments.
Problem is many novice traders focus on the part where a leveraged ETF can deliver double or triple the results of its underlying index in a single day and then apply that line of thinking to longer-term moves. A trader new to leveraged ETFs may be apt to ponder an outcome such as the S&P 500 rising 20% over a year and say “Why not hold SPXL all year and make 60%?”
However, due daily rebalancing using swaps and derivatives to obtain leveraged exposure, leveraged ETFs can and do deviated wildly from their stated investment objectives over long holding periods and that scenario can create large, unexpected losses for investors. In other words, it’s possible for the S&P 500 to be positive in a particular and see SPXL close lower in the same year.
For traders that can treat leveraged ETFs as short-term positions, some of the following funds may be compelling wagers over the near-term.
Direxion Daily Consumer Discretionary Bull 3X Shares (WANT)
Expense ratio: 0.98% per year, or $98 on a $10,000 investment.
The Direxion Daily Consumer Discretionary Bull 3X Shares (NYSEARCA:WANT) is designed to the deliver triple the daily returns of the Consumer Discretionary Select Sector Index. It’s also one of the newer leveraged ETFs, having debuted last November.
One thing leveraged ETFs are excellent ideas for is trading around earnings announcements and that’s part of the reason WANT is being highlighted here. On Wednesday, Nike (NYSE:NKE), one of the names in WANT’s underlying, reported stellar fiscal first-quarter results, indicating the upcoming earnings season could be kind to consumer cyclical stocks.
Additionally, WANT is a solid idea for capital-starved investors looking to trade around Amazon.com (NASDAQ:AMZN) headlines because that stock accounts for more than 23% of the Consumer Discretionary Select Sector Index.
ProShares Ultra Russell2000 (UWM)
Expense ratio: 0.95%
The ProShares Ultra Russell2000 (NYSEARCA:UWM) seeks daily results that are double that of the widely followed Russell 2000 Index. Broadly speaking, small caps are more volatile than their large-cap counterparts and that volatility can be helpful to traders to using leveraged ETFs.
What makes UWM an interesting choice among leveraged ETFs over the near-term are recent signs of a small-cap resurgence, that if durable, could provide enough gains in short order for traders to move in and out of UWM, muting the temptation to hold this fund for more than a few days.
Steven DeSanctis, equity strategist at Jefferies “predicts Russell 2000 index company earnings growth could be as high as 10% next year, after a year in which rising labor and input costs, along with the fading effects of the 2017 corporate tax cut, led Russell 2000 earnings to fall significantly year-to-date,” reports MarketWatch.
If markets price in that scenario sooner, UWM could rally to start the fourth quarter.
Direxion Daily Utilities Bull 3X Shares (UTSL)
Expense ratio: 1.07%
The utilities sector is one of the best-performing groups this year, but it can be a snooze fest. That’s the way long-term investors should like it. Aggressive, short-term traders? Not so much. The Direxion Daily Utilities Bull 3X Shares (NYSEARCA:UTSL), the first and only leveraged ETF for the utilities sector, is the premier way to bring some spice to a normally staid group of stocks.
UTSL looks to deliver triple the daily returns of the Utilities Select Sector Index. This isn’t advice, but rather a statement fact: given the usually low levels of volatility associated with the utilities sector, traders don’t need to rush out of UTSL the way they would with a leveraged ETF tracking a more turbulent sector.
“It’s not a surprise that investors are fond of utilities,” reports Ben Levisohn for Barron’s. “As a source of income, they do well when Treasury yields are falling, and that’s been the story for yields in 2019, the recent rise notwithstanding. Investors also like utilities for the fact that they have slow, predictable earnings, a great thing to have if you expect a recession in the future. And many people do.”
Reminder: utilities funds, including this leveraged ETF, currently reside near all-time highs so gains from here may be somewhat limited.
ProShares UltraShort Silver (ZSL)
Expense ratio: 0.35%
Leveraged ETFs are not limited to stocks. An array of these geared funds provide exposure to other asset classes, namely bonds and commodities. The P<roShares UltraShort Silver (NYSEARCA:ZSL) merits a look here not only because silver is volatile, but also because the white metal has recently run up in dramatic fashion, indicating it could be primed for a near-term pullback.
Silver prices tumbled about 4% on Wednesday, Sept. 25, prompting a 8.33% surge by ZSL on volume that was more than double the daily average. ZSL is designed to deliver double the daily inverse returns of the Bloomberg Silver Subindex.
If ZSL can work its way back to $30, upside from there could be considerable and would likely also spell the end of silver’s recent bull market.
Direxion Daily 7-10 Year Treasury Bull 3X Shares (TYD)
Expense ratio: 1.10%
The Direxion Daily 7-10 Year Treasury Bull 3X Shares (NYSEARCA:TYD) is an ideal for risk-tolerant traders to take advantage of declining Treasury yields. This leveraged ETF looks to deliver triple the daily returns of the ICE U.S. Treasury 7-10 Year Bond Index.
Like any other leveraged ETF, TYD shouldn’t be held for extensive time frames, but the fund jumped 15% between June and August, a period that included the Federal Reserve’s July rate cut. The fourth quarter could be an interesting time to consider TYD as well.
“Heading into autumn, traders can likely expect more attention paid to the fixed-income market and other rate-sensitive instruments as all eyes turn to the Federal Reserve for three more planned meetings of the FOMC,” said Direxion in a note out earlier this month. “Because the Fed’s current monetary policy plan seems to be ‘there is no plan,’ traders will certainly be eager for whatever hints the Fed members might be willing to drop prior to the September, October and December meetings.”
Todd Shriber does not own any of the aforementioned securities.