With the U.S. equity markets surging, it shouldn’t be too surprising to note that many leveraged ETFs have had solid starts to the year (read: Best ETFs to Start 2013). These products create a leveraged long position in the underlying index through the use of swaps, options, future contracts and other financial instruments and are capable of big gains (or losses) in short time periods.
While these funds seem to be attractive and have produced handsome returns YTD, investors should note that they involve a great deal of risk when compared to traditional ETFs. Most leveraged products are only designed to match the performance of an index over a single trading session, leading to possible deviations in the long-term holdings of these securities from an underlying index.
Thus, these products are not suitable for long-term buy as these are rebalanced on a daily basis and can produce terrible performances as a result. This can happen particularly during periods in which deep trends are absent, and markets are oscillating between gains and losses (read: Guide to The 10 Most Popular Leveraged ETFs). Instead, investors could hedge their exposure or make a short-term play with these products on the bullish market.
Leveraged ETFs in Focus
Leverage ETFs are often more costly and can be less tax-efficient. As a result, investors seeking leveraged exposure in the space should monitor the funds closely and manage their portfolio on a daily basis in order to make the best decisions.
With that being said, some have done quite well over the longer term and have produced robust gains so far in 2013. Below, we highlight some of the best performing leveraged products this year, which have easily crushed the market—with much greater volatility—to start the year:
Direxion Daily Semiconductor Bull 3x Shares (SOXL)
This fund delivered a return of over 34% and managed assets of $76.5 million so far in the year. It seeks to deliver thrice (3x or 300%) the daily performance of the PHLX Semiconductor Sector Index, before fees and expenses. The index measures the performance of the semiconductor segment of the U.S. equity market.
The fund has a nice mixture of all cap securities with 46% of the assets assigned to large caps, 41% to mid caps and the rest to small caps. An extra cost shouldn’t be an issue in terms of bid ask spreads, as the product trades in average volumes of over 350,000 shares a day.
Direxion Daily Energy Bull 3X Shares (ERX)
With AUM of $190.8 million, this fund gained over 29% YTD and is skewed towards large cap securities. It seeks to deliver three times the daily exposure of the Energy Select Sector Index. The index measures the performance of companies from the oil and gas, consumable fuels, oil, and gas equipments and services etc (read: Energy ETFs: Strong Start to 2013).