Leveraged ETFs


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Direxion 2x, 3x MarketCap ETFs


These ETFs provide multiple-times exposure to the performance of the underlying index. These funds employ various investment strategies such as use of swaps, futures contracts and other derivative instruments to accomplish their objectives.

Since most of these ETFs seek to attain their goals on a daily basis, their performance could vary significantly over a longer period when compared to the shorter period due to their compounding effect. Still, the space remains attractive for investors seeking high returns in a short time. Below we highlight the five top-performing leveraged ETFs of Q3. Health-care stocks hauled in solid assets in Q3 and has been one of the top performers so far this quarter.

All these have led CURE to add about Will the Rally Last? This has been yet another soaring sector. After the worst first half performance since , the Dow Jones rebounded to show some strength in the third quarter.

There were a flurry of solid corporate earnings and upbeat news from the Dow component. The uptrend in the energy sector also gave a boost to the fund read: More Upside for ETFs? The transportation sector has also performed well in Q3 due to economic growth. GDP, robust job gains, moderate wage growth, record consumer confidence and higher spending and week-long Labor Day travel helped the fund to add solid returns read: It marked the sharpest increase in manufacturing production since June The reading hinted at the sturdiest expansion in manufacturing in four months, mainly driven by faster increases in output and new orders read: Generally speaking, daily compounding of leveraged long ETFs can result in increasing percentage gains in rising markets and decreasing percentage drops as markets trend lower.

If an index rises for several days in a row, the trending movement is very important, as that will translate into ETF growth at a faster pace as the value of the index is increasing.

For a long leveraged product, it will outperform its expected goals in a rising market and will underperform its expected goals in a falling market. The index and the double-leveraged ETF tracking that index both started out at In essence, the ETF is doing what it is supposed to do: However, because of an increasing price, those gains are driving the value higher at a faster pace.

What this shows is that in a trending market—because of daily compounding—you achieved a return of much greater than twice the index return. In the next chart, you can see the grid depicting the opposite event. The daily compounding of the leveraged ETFs will magnify this effect. Finally, you can see the results from a market that is range bound, although in a high volatility drift. This gut-wrenching movement would exacerbate the drag on a leveraged long ETF position.

Although the movements are of equal size daily and the ETF is still achieving its daily 2 times return goal, it endures significant drag on its long-term performance. These are the types of results that you can expect to receive if you hold a leveraged ETF position for more than a day. They demonstrate how there is a path-dependent function of leveraged ETF returns that will have a direct effect on their long-term return results. If your timing and positioning are correct, then this effect can be a benefit to your positioning, and if it's not, they can be a drag on your portfolio.

So it's important that you are correct on your market direction and your timing. You will need both to be correct to help position you when trends begin. Leveraged and inverse exchange traded products are not designed for buy and hold Investors or investors who do not intend to manage their investment on a daily basis.

These products require a Most Aggressive investment objective and an executed Designated Investments Agreement to purchase. These products are for sophisticated investors who understand their risks including the effect of daily compounding of leveraged investment results , and who intend to actively monitor and manage their investments on a daily basis.

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Your email address Please enter a valid email address. Article copyright by David J. The statements and opinions expressed in this article are those of the author. This reprint and the materials delivered with it should not be construed as an offer to sell or a solicitation of an offer to buy shares of any funds mentioned in this reprint.

The data and analysis contained herein are provided "as is" and without warranty of any kind, either expressed or implied. Fidelity is not adopting, making a recommendation for or endorsing any trading or investment strategy or particular security. All opinions expressed herein are subject to change without notice, and you should always obtain current information and perform due diligence before trading.

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