Leveraged exchange traded funds have capitalized off some market segments, juicing the returns of the ongoing bull rally or capitalizing off the misfortunes of other areas.
Geared or leveraged exchange traded products try to generate the multiple returns of a given market by taking on leverage through derivatives instruments, and these investment tools are not for the faint of heart.
With greater returns, traders are exposed to greater risks. These products are best suited for active, risk-tolerant traders, something that both ProShares and Direxion, the two largest issuers of leveraged of inverse and leveraged ETFs, do a good job of explaining to investors on their web sites.
If someone where unfortunate enough to stick with these types of products in a down market, an investor could see their investments quickly disappear. [10 Worst Leveraged ETFs of 2014]
Since these leveraged ETFs typically rebalance holdings on a daily basis, compounding issues can cause underperformance to their main objective during volatile market conditions. [Do You Know How Your Leveraged ETFs Work?]
Nevertheless, a strong bull market without long interruptions and relative lack of volatility helped maintain positive gains in some leveraged ETFs. Since the ETFs rebalance on a daily basis, the compounding effect actually benefited leveraged ETFs in an upward-trending market. As the following list of the 2014’s 10 best leveraged ETFs shows, some geared products greatly benefited from the right market conditions. All performances are as of December 11.
PowerShares DB 3x Long 25+ Year Treasury Bond ETN (NYSEArca: LBND)
Year-to-date gain: 84.6%
Comment: LBND takes the 3x or 300% performance of long-term U.S. Treasury bonds with at least 25 years remaining to maturity. The exchange traded note has capitalized off the unexpected fall in yields this year and rising demand for U.S. debt.
Direxion Daily 20+ Year Treasury Bull 3x Shares ETF (NYSEArca: TMF)
Year-to-date gain: 98.3%
Comment: Like LBND, TMF reflects the leveraged 3x or 300% performance of long-term Treasuries, except the Direxion offering tracks U.S. Treasuries with at least 20 years remaining to maturity.
Direxion Daily Healthcare Bull 3x Shares (NYSEArca: CURE)
Year-to-date gain: 80.6%
Comment: Healthcare stocks have been among the best performing areas of the market, and CURE has been riding the wave. The ETF takes the 3x or 300% daily performance of the S&P Health Care Select Sector Index.
Direxion Daily Semiconductors Bull 3x Shares (NYSEArca: SOXL)
Year-to-date gain: 86.9%
Comment: SOXL tries to reflect the 3x or 300% daily performance of the PHLX Semiconductor Select Index. In the tech space, semiconductors have been gaining momentum as the world becomes ever more interconnected and usage of personal devices proliferates.
PowerShares DB Crude Oil Double Short ETN (NYSEArca: DTO)
Year-to-date gain:115%
Comment: DTO takes the -2x or negative 200% performance of oil futures contracts. With crude oil prices trading near $60 per barrel, a five-year low, inverse oil plays have been burning up. We are experiencing a glut in the oil market as the Organization of Petroleum Exporting Countries maintains its supply output, the U.S. enjoys an oil boom from new hydraulic fracturing techniques and global demand begins to wane. [As Oil Plunged in November, Energy ETFs Added Assets]
ProShares UltraShort Bloomberg Crude Oil (NYSEArca: SCO)
Year-to-date gain: 126.2%
Comment: Like DTO, SCO also reflects a short leveraged position on oil prices. The ProShares offering tries to generate the -2x or negative 200% daily performance of the Bloomberg WTI Crude Oil Subindex.
Direxion Daily Real Estate Bull 3x Shares ETF (NYSEArca: DRN)
Year-to-date gain: 103.3%
Comment: DRN, which takes the 3x or 300% daily performance of the MSCI US REIT Index, has benefited from the surge in interest for real estate investment trusts this year as investors turned back to high-yielding assets in response to falling Treasury yields. [REITs ETF: Attractive Yields in a Low-Rate Environment]
PowerShares DB 3x Italian Treasury Bond Futures ETN (NYSEArca: ITLT)
Year-to-date gain: 65.7%
Comment: ITLT suddenly surged Thursday after Italian banks raised holdings on the country’s sovereign debt to a record high in response to recession concerns. Gains in ITLT were compounded since the underwriting bank ceased creations on new shares, which caused the ETN to trade at a drastic premium to its net asset value. However, the premium was more or less erased Friday. [Creations Stopped in Two Italy Bond ETNs]
VelocityShares Daily 3x Inverse Crude ETN (NYSEArca: DWTI)
Year-to-date gain: 228%
Comment: DWTI provides an even greater leveraged inverse exposure to oil, reflecting the -3x or negative 300% performance of oil futures. [Some of the Best Leveraged ETFs are Getting No Love]
Direxion Daily Russia Bear 3x Shares (NYSEArca: RUSS)
Year-to-date gain: 184.3%
Comment: RUSS has the honor of being the best performing leveraged ETF so far this year. The leveraged inverse Russia ETF tries to reflect the -3x or negative 300% performance of Russian equities, which have been hammered this year after rising volatility in response to the Ukraine conflict, Western sanctions against the Russian economy and the precipitous fall in oil prices, a major Russian export. [Options Traders Bet on Bigger Declines for Russia ETF]