Hopes of the tax reform bill being passed as well as rounds of upbeat economic data were the major catalysts to improved stock performance in November. This is especially true as the U.S. economy is expanding at the fastest pace in three years according to the second GDP estimate of the Commerce Department and the highest level of consumer confidence in 17 years.
Holiday optimism and jump in oil price are also adding to the strength. Investors should note that the dual tailwinds of strong corporate earnings and improving economic growth have pushed stocks higher throughout the year.
The bullishness has 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 five ETFs that crushed the market in November with abnormal returns piled up in a short period. Moreover, these funds will continue to be investors’ darlings heading into Christmas if sentiments remain the same.
This ETF targets the retail corner of the U.S. consumer sector with three times (3x) leveraged exposure to the S&P Retail Select Industry Index. It has amassed about $41.4 million in its asset base while charges 95 bps in fees per year. Volume is moderate as it exchanges around 73,000 shares a day on average. The fund gained 33.5% in November (read: Should You Buy Retail ETFs Now?).
The fund creates a three times leveraged long position in the Dow Jones U.S. Select Home Construction Index. It charges an annual fee of 95 bps and trades in a light average daily volume of about 23,000 shares. The fund has accumulated AUM of $76.5 million and surged about 28.8% last month.
This ETF targets the transportation sector and seeks to deliver thrice the daily performance of the Dow Jones Transportation Average. The product has AUM of $3.2 million and charges 95 bps in fees and expenses. It trades in lower volumes of about 3,000 shares per day and was up 16.2% last month.
This product tracks the Dow Jones Industrial Average and offers three times exposure to the index. It has amassed $324.9 million in its asset base and trades in a solid average daily volume of about 316,000 shares. Expense ratio came in at 0.95%. The ETF added 12.4% in November (read: Dow Rallies: More Upside for ETFs?).
This fund provides two times (2x) leveraged exposure to the Dow Jones U.S. Consumer Services Index. It charges an annual fee of 95 bps and trades in a paltry average daily volume of about 2,000 shares. The fund has accumulated AUM of $19 million and gained about 11.7% last month.
While this strategy is highly beneficial for short-term traders, it could lead to huge losses compared with traditional funds in fluctuating or seesaw markets. Further, their performances could vary significantly from the actual performance of their underlying index over a longer period when compared with 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 global equities for the near term, either 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 a friend in this corner of the investing world.
The ProShares UltraPro Dow 30 ETF (UDOW) was unchanged in premarket trading Monday. Year-to-date, UDOW has gained 87.24%, versus a 19.40% rise in the benchmark S&P 500 index during the same period.
This article is brought to you courtesy of Zacks Research.