5 Best Leveraged or Inverse ETFs of Volatile December

Wall Street witnessed huge volatility in December. The major bourses hit a series of new all-time highs early in the month extending the post-election rally on resurge of the tech stocks. The Dow Jones Industrial Average crossed the 45,000 milestone for the first time, while the S&P 500 touched nearly 6,100. The tech-heavy Nasdaq Composite Index topped the 20,000 milestone. 

However, the rally faltered mid-month due to the Fed’s less dovish stance. The major indices saw their worst week since mid-November. The Dow Jones fell 2.3% last week, while the S&P 500 and Nasdaq declined 2% and 1.8%, respectively. The Fed envisions only two rate cuts in 2025, in contrast to four projected in September, given a solid labor market and sticky inflation (read: Wall Street Dives on Less Dovish Fed: 5 ETF Zones That Win).

The market bounced back this week, with the Santa Rally gaining momentum. The S&P 500 is up 1.8% so far this week, while the Dow Jones has gained 1.1%. Mega-cap tech stocks resumed their ascent, rising 2.3% week to date. A Santa Claus rally refers to the increase in stock prices in the final week of the calendar year (i.e., between Christmas and New Year’s Day) that extends into the first two days of the new year. 

The uncertain environment has resulted in increased demand for leveraged and inverse-leveraged ETFs as these fetch outsized returns on quick market turns in a short span. We have highlighted a bunch of the best-performing leveraged or inverse leveraged ETFs that are leading over the past month. These include MicroSectors Oil & Gas Exp. & Prod. -3x Inverse Leveraged ETN OILD, Direxion Daily Electric and Autonomous Vehicles Bull 2X Shares EVAV, MicroSectors Gold Miners -3X Inverse Leveraged ETN GDXD, Direxion Daily MSCI Real Estate Bear 3X Shares DRV, and MicroSectors FANG+ Index 3X Leveraged ETN FNGU. The funds will remain investors’ darlings, provided sentiments remain similar. 

MicroSectors Oil & Gas Exp. & Prod. -3x Inverse Leveraged ETN (OILD) – Up 41.3%

MicroSectors Oil & Gas Exp. & Prod. -3x Inverse Leveraged ETN is linked to three times inverse performance of the MicroSectors Oil & Gas Exploration & Production Index. The index provides exposure to large-capitalization companies that are domiciled and listed in the United States, and active in the exploration and production of oil and gas. MicroSectors Oil & Gas Exp. & Prod. -3x Inverse Leveraged ETN has amassed $3.6 million in its asset base and trades in a lower average volume of 65,000 shares. It charges investors 95 bps in annual fees and expenses (read: Oil ETFs Gained 4% Last Week: Can the Rally Last?).

Direxion Daily Electric and Autonomous Vehicles Bull 2X Shares (EVAV) - Up 23.7%

Direxion Daily Electric and Autonomous Vehicles Bull 2X Shares seeks to track two times the performance of the Indxx US Electric and Autonomous Vehicles Index. It has accumulated $5 million in its asset base. Direxion Daily Electric and Autonomous Vehicles Bull 2X Shares charges 95 bps in annual fees and trades in an average daily volume of 14,000 shares.

MicroSectors Gold Miners -3X Inverse Leveraged ETN (GDXD) – Up 22.4%

MicroSectors Gold Miners -3X Inverse Leveraged ETN seeks to offer three times inverse leveraged exposure to the S-Network MicroSectors Gold Miners Index. It has accumulated $65.7 million in its asset base and trades in an average daily volume of 854,000 shares. GDXD charges 95 bps in annual fees.

Direxion Daily MSCI Real Estate Bear 3X Shares (DRV) – Up 21.4%

Direxion Daily MSCI Real Estate Bear 3X Shares seeks to deliver three times the inverse performance of Real Estate Select Sector Index. It has AUM of $66.4 million and an average daily volume of around 154,000 shares. Direxion Daily MSCI Real Estate Bear 3X Shares charges 95 bps in fees per year.

MicroSectors FANG+ Index 3X Leveraged ETN (FNGU) – Up 20%

MicroSectors FANG+ Index 3X Leveraged ETN seeks to offer three times leveraged exposure to the NYSE FANG+ Index. The Index includes 10 highly liquid stocks that represent a segment of the technology and consumer discretionary sectors consisting of highly-traded growth stocks of technology and tech-enabled companies. MicroSectors FANG+ Index 3X Leveraged ETN charges 95 bps in annual fees and trades in an average daily volume of around 729,000 shares. It has accumulated $8 billion in its asset base.

Leveraged and Inverse-Leveraged ETFs

Leveraged and inverse-leveraged ETFs either create a leveraged long/short position, an inverse long/short position, or a leveraged inverse long/short position in the underlying index through the use of swaps, options, futures contracts or other financial instruments. Due to their compounding effect, investors can enjoy higher returns in a short period, provided the trend remains a friend (see: all the Inverse Equity ETFs here). 

However, these funds run the risk of huge losses compared to traditional funds in fluctuating or seesawing markets. Further, their performance could vary significantly from the actual performance of their underlying index over a longer period when compared to a shorter period (such as weeks or months). 

Investors should note that these products are suitable only for short-term traders as these are rebalanced on a daily basis. Further, liquidity can be a big problem as it can make the products more expensive than they appear.

Want key ETF info delivered straight to your inbox?

Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

To read this article on Zacks.com click here.

Zacks Investment Research