A leveraged ETF is a security that uses financial derivatives and debt to amplify the returns of an underlying index. While a traditional ETF usually tracks the securities in its underlying index on a one-to-one basis, a leveraged ETF aims for two or three times amplification of the securities it holds.
Besides tracking an underlying index, a leveraged ETF might use financial products and debt to magnify returns. The main objective of leveraged ETFs is to generate daily returns that are multiples of the performance of the underlying index.
Leveraged ETFs are usually used as short-term bets by traders who want to take advantage of the index’s short-term momentum. Albeit risky, a leveraged ETF can offer significant gains exceeding the underlying index.
Amid the uncertain macroeconomic environment, utilities are expected to do well. Thus, it could be wise to add ProShares Ultra Utilities (UPW) to your portfolio. Since gold’s prospects look uncertain, MicroSectors Gold Miners -3X Inverse Leveraged ETNs (GDXD) should benefit too.
However, it could be wise to avoid Direxion Daily Semiconductor Bull 3X Shares (SOXL) due to the weak short-term prospects of the semiconductor industry.
ETF to Avoid:
Direxion Daily Semiconductor Bull 3X Shares (SOXL)
SOXL is an ETF launched by Direxion Investments. Rafferty Asset Management manages the fund, LLC. It invests directly, through derivatives and other funds, in stocks of companies operating across the information technology, semiconductors, and semiconductor equipment sectors. The fund uses derivatives such as futures and swaps to create its portfolio. It seeks to track 3x the daily performance of the PHLX Semiconductor Sector Index.
SOXL has $3.71 billion in assets under management (AUM). Its major holding is Dreyfus Government Cash Management Funds Institutional (DGCXX), with a 32.61% weighting in the fund, followed by Goldman Sachs Trust Financial Square Treasury Instruments Fund Institutional (FTIXX) at 14.19%, and U.S. Dollar at 4.43%. It currently has 35 holdings in total.
SOXL has gained 81.7% in price year-to-date to close the last trading session at $12.42.
SOXL’s POWR Ratings reflect this promising outlook. The ETF has an overall rating of F, which equates to a Strong Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
SOXL has an F for Trade and Buy & Hold grade and a D for Peer. Of the 101 ETFs in the F-rated Leveraged ETFs group, SOXL is ranked #46.
ETFs to Buy:
ProShares Ultra Utilities (UPW)
ProShare Advisors LLC manages UPW. It invests through derivatives in stocks of companies operating in the utility sector. It uses derivatives such as swaps to create its portfolio. The fund seeks to track 2x the daily performance of the Dow Jones U.S. Utilities Index.
UPW has $20.10 million AUM. Its major holdings include the U.S. dollar, with a 19.40% weighting in the fund, followed by NextEra Energy, Inc. (NEE) at 11.60%, and The Southern Company (SO) at 5.75%. It currently has 50 holdings in total.
The ETF’s 0.95% expense ratio compares to the 1% category average. UPW has gained 16.8% in price over the past nine months to close the last trading session at $78.89.
It’s no surprise that UPW has an overall B rating, which equates to Buy in our proprietary POWR Ratings system.
In addition, UPW has an A grade for Trade and Peer and a B for Buy & Hold. Of the 101 ETFs in the Leveraged Equities ETFs group, UPW is ranked #4.
MicroSectors Gold Miners -3X Inverse Leveraged ETNs (GDXD)
GDXD is a note that provides 3x daily inverse leveraged exposure. Its underlying index, the S-Network MicroSectors Gold Miners Index, comprises ETFs, VanEck Gold Miners ETF (GDX) and VanEck Junior Gold Miners ETF (GDXJ), which invest in the global gold mining industry. GDXD has $27.20 million AUM.
The ETF’s 0.95% expense ratio compares to the 1.12% category average. GDXD has gained 158.6% in price over the past six months to close the last trading session at $25.69.
GDXD’s POWR Ratings reflect solid prospects. It has an overall rating of B, equating to a Buy in our proprietary rating system.
GDXD has an A grade for Trade and Peer. Within the same ETFs group, GDXD is ranked #8. Click here to see GDXD’s ratings for Buy & Hold.
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SOXL shares fell $12.42 (-100.00%) in premarket trading Wednesday. Year-to-date, SOXL has declined -81.98%, versus a -17.30% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets. More...
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