With the U.S. equity markets surging, it shouldn't be too
surprising to note that many leveraged
ETFs
have had solid starts to the year (read:
Best ETFs to Start 2013
). These products create a leveraged long position in the
underlying index through the use of swaps, options, future
contracts and other financial instruments and are capable of big
gains (or losses) in short time periods.
While these funds seem to be attractive and have produced
handsome returns YTD, investors should note that they involve a
great deal of risk when compared to traditional ETFs. Most
leveraged products are only designed to match the performance of
an index over a single trading session, leading to possible
deviations in the long-term holdings of these securities from an
underlying index.
Thus, these products are not suitable for long-term buy as
these are rebalanced on a daily basis and can produce terrible
performances as a result. This can happen particularly during
periods in which deep trends are absent, and markets are
oscillating between gains and losses (read:
Guide to The 10 Most Popular Leveraged ETFs
). Instead, investors could hedge their exposure or make a
short-term play with these products on the bullish market.
Leveraged ETFs in Focus
Leverage ETFs are often more costly and can be less
tax-efficient. As a result, investors seeking leveraged exposure
in the space should monitor the funds closely and manage their
portfolio on a daily basis in order to make the best
decisions.
With that being said, some have done quite well over the
longer term and have produced robust gains so far in 2013. Below,
we highlight some of the best performing leveraged products this
year, which have easily crushed the market-with much greater
volatility-to start the year:
Direxion Daily Semiconductor Bull 3x Shares (
SOXL
)
This fund delivered a return of over 34% and managed assets of
$76.5 million so far in the year. It seeks to deliver thrice (3x
or 300%) the daily performance of the PHLX Semiconductor Sector
Index, before fees and expenses. The index measures the
performance of the semiconductor segment of the U.S. equity
market.
The fund has a nice mixture of all cap securities with 46% of
the assets assigned to large caps, 41% to mid caps and the rest
to small caps. An extra cost shouldn't be an issue in terms of
bid ask spreads, as the product trades in average volumes of over
350,000 shares a day.
Direxion Daily Energy Bull 3X Shares (
ERX
)
With AUM of $190.8 million, this fund gained over 29% YTD and
is skewed towards large cap securities. It seeks to deliver three
times the daily exposure of the Energy Select Sector Index. The
index measures the performance of companies from the oil and gas,
consumable fuels, oil, and gas equipments and services etc (read:
Energy ETFs: Strong Start to 2013
).
Volume is extremely high in this fund, coming in at just under
one million shares a day. This suggests that liquidity is quite
high and that bid ask spreads shouldn't be too big of a
concern.
Direxion Daily Healthcare Bull 3X Shares (
CURE
)
This fund, targeting the healthcare sector, generated returns
of about 28% YTD. It seeks to deliver thrice (3x or 300%) the
daily performance of the Healthcare Select Sector Index, before
fees and expenses. The product focuses on large caps with
pharmaceuticals as the top sector within the healthcare.
The ETF failed to garner investor interest with just $13.4
million in its asset base and paltry trading volume of only 5,000
shares per day on average. This suggests that investors have to
pay an additional cost for this unpopular (but top performing)
product, beyond the annual fees of 95 bps.
Direxion Daily Mid Cap Bull 3x ETF (
MIDU
)
Like CURE, this ETF also delivered about 28% returns so far
this year but targets the U.S. mid cap securities. The fund seeks
to deliver three times (3x or 300%) the daily performance of the
S&P Mid Cap 400 Index, before fees and expenses. The product
has a slight tilt towards industrials, closely followed by
technology and financials (read:
Mid Cap ETFs Leading the Market in 2013
).
The fund has an asset base of $48.8 million and involves a
relatively small bid/ask spread, trading in daily volume of about
100,000 shares.
Direxion Daily Financial Bull 3X Shares (
FAS
)
This is one of the largest and popular funds in the leveraged
space with AUM of over $1 billion. The fund gained nearly 26% YTD
and provides exposure to the financial sector (read:
Financial ETFs Set to Rally in Earnings
Season
). It seeks investment returns that correspond to 3x the daily
returns of the Russell 1000 Financial Services Index.
The product is widely diversified across the entire spectrum
of market capitalization. It is highly liquid, ensuring no extra
cost for the product.
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DIRX-D HC BL3X (CURE): ETF Research Reports
DIR-EGY BULL 3X (ERX): ETF Research Reports
DIR-FIN BULL 3X (FAS): ETF Research Reports
DIRX-MC BULL 3X (MIDU): ETF Research Reports
DIR-D SM BL 3X (SOXL): ETF Research Reports
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