Consider these high-risk, high-reward investments carefully.
In November 2020, the U.S. Securities and Exchange Commission passed new regulations that would allow exchange-traded fund providers to bring out new “leveraged” products without seeking prior approval. Beyond any potential future offerings that could be confusing, less sophisticated investors may not even understand the current lineup of leveraged funds. For those unfamiliar, “leverage” in ETFs simply means using sophisticated financial instruments to generate two or even three times the typical performance of peer funds. It should go without saying that these ETFs are incredibly volatile and risky as losses could be twice as bad even if profits might be twice as good. A close relative to ETFs, exchange-traded notes — which are unsecured debt securities that track an underlying index — are also available as leveraged options. For those looking to make short-term tactical bets, leveraged investments are a way to rack up profits in a hurry. Here are seven popular leveraged ETFs and ETNs that represent the available options for aggressive investors.
Direxion Daily Technology Bull 3X Shares (ticker: TECL)
Direxion is the leading provider of leveraged ETFs on Wall Street, and this product is among the most popular offerings in its arsenal with roughly $2 billion in total assets. That’s not just big for a leveraged fund, but it’s bigger than many conventional ETFs out there as well. As the name implies, the fund is focused on tech stocks — such as Apple (AAPL) and Microsoft Corp. (MSFT) — and seeks to deliver three times the performance of this sector. That’s evidenced by TECL surging around 30% this year, compared with only about 9% for the broader S&P 500. However, keep in mind that it was certainly not a steady grind higher but characterized by a heck of a lot of volatility along the way, which is typical for leveraged funds. As a leveraged ETF, TECL comes with a relatively high annual expense ratio of 1.08%, or $108 for every $10,000 invested.
Direxion Daily Financial Bull 3X Shares (FAS)
The flip side of leveraged funds that tack on outsized gains are ETFs like FAS that deliver three times the losses when things lurch to the downside. As the pandemic wore down many local economies, with restaurants and retailers hurting and the unemployment rate rising, financial institutions naturally took a hit as lending dried up and borrowers had trouble paying the bills. As a result, this leveraged ETF — which holds stocks such as JPMorgan Chase & Co. (JPM) and Berkshire Hathaway (BRK.B) — took a massive hit and remains down about 50% year to date in 2020. That proves these fast-moving funds can suck your account dry just as fast as they dish out profits in good times. FAS has an expense ratio of 0.99%.
MicroSectors FANG+ Index 3X Leveraged ETN (FNGU)
Looking beyond Direxion’s suite of funds, innovative asset management firm MicroSectors distinguishes itself by limiting its exchange-traded products to a very tiny list of holdings — and then going all in. Its most popular vehicle is this FANG+ offering with exposure to the performance of 10 of the largest tech stocks, including Facebook (FB), Amazon.com (AMZN), Netflix (NFLX) and Google parent Alphabet (GOOGL), which make up the “FANG” acronym. For investors who are interested in this limited group of stocks but want a slightly milder leveraged option, MicroSectors also offers the MicroSectors FANG+ Index 2X Leveraged ETN (FNGO) that only aims for twice the performance of these 10 stocks instead of three times. Considering FNGU is up a staggering 180% so far this year, there’s something to be said for just going for the home run instead of playing it a bit safer. FNGU’s expense ratio is 0.95%.
Direxion Daily Small Cap Bull 3X Shares (TNA)
If you want to focus on fast-moving stocks, then chances are you’re already interested in small-cap companies with a smaller overall market value than the big name tech stocks like those in the FANG fund. That’s because small companies are naturally more volatile, seizing opportunities faster than the often bureaucratic megacorporations that have deep pockets but less urgency in their overall strategy. In 2020, smaller stocks have been particularly hit hard by the pandemic, and this fund has slumped nearly 40% year to date. If and when the economy bounces back, this leveraged ETF could surge in short order. TNA has an expense ratio of 1.12%.
UBS AG FI Enhanced Large Cap Growth ETN (FBGX)
An interesting alternative to small caps is this UBS leveraged ETN, which is comprised of a supercharged portfolio with exposure to large companies that exhibit growth characteristics by tracking the Russell 1000 Growth Total Return Index. Though the FANG players make an appearance here — with tech representing about 30% of the ETN’s exposure — rather than just pile into Big Tech, this UBS ETN is spread across the rest of the market with a bias toward firms consistently growing their sales and profits. That growth-oriented strategy has really paid off lately, with about a 40% return for FBGX in 2020 so far. The ETN has a lower expense ratio than other ETFs on this list, at 0.85%.
Direxion Daily S&P 500 Bull 3X Shares (SPXL)
Investors who chase leveraged ETFs often aren’t interested in any form of diversification. After all, these funds are inherently about putting extra eggs in fewer baskets in the pursuit of outperformance. However, it’s safe to say that all the prior ETFs and ETNs demand you make a tactical decision on which corner of the stock market you think is going to succeed — and while some tech funds went up, the crash of the leveraged bank and small-cap funds shows this strategy cuts both ways. If you’d rather just play the field (but play it in a big way), consider SPXL, which aims to deliver three times the returns of the S&P 500 on a daily basis. The fund has an expense ratio of 1.01%.
Direxion Daily S&P 500 Bear 3X Shares (SPXS)
Of course, it’s worth mentioning that you don’t have to pick leveraged funds that move in the same direction as their underlying index. The opposite of SPXL is SPXS — an “inverse” leveraged fund that seeks to deliver three times the daily move of the S&P 500 in the other direction. In other words, when the market cratered this spring after pandemic fears hit their peak, this fund was able to tack on 65% gains across a roughly one-month period. That’s not just a hedge but a big profit generator if used the right way at the right time. SPXS comes with an expense ratio 1.07%.
These risky leveraged ETFs and ETNs offer big potential:
— Direxion Daily Technology Bull 3X Shares (TECL)
— Direxion Daily Financial Bull 3X Shares (FAS)
— MicroSectors FANG+ Index 3X Leveraged ETN (FNGU)
— Direxion Daily Small Cap Bull 3X Shares (TNA)
— UBS AG FI Enhanced Large Cap Growth ETN (FBGX)
— Direxion Daily S&P 500 Bull 3X Shares (SPXL)
— Direxion Daily S&P 500 Bear 3X Shares (SPXS)
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