Investors should also keep in mind that most leveraged ETFs are designed to produce double or triple the performance of the underlying market on a daily basis. Consequently, when investors look at the long-term performance of a typical leveraged ETF, people may notice that the fund may not perfectly reflect their intended strategies.
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A market without long interruptions and relative lack of volatility will help maintain positive gains in a leveraged ETF. Since the ETFs rebalance on a daily basis, compounding effects benefit leveraged ETFs in a consistently trending market. On the other hand, in times of increased volatility, leveraged ETF returns can fall behind their intended 2x or 3x strategies. Leveraged and inverse ETF traders should closely monitor their holdings.
Direxion leveraged and inverse ETFs are a “tactical trade idea for sophisticated traders looking to express an opinion on volatility,” Jablonski said.
Advisors and investors seeking to hedge risks or tactically position for short-term swings have a number of options available. For example, as the energy market rebounds, traders can look to the Direxion Daily Energy Bull 3X Shares (NYSEArca: ERX), Direxion Daily Natural Gas Related Bull 3X (NYSEArca: GASL) and Direxion Daily S&P Oil & Gas Exploration & Production Bull 3x Shares (NYSEArca: GUSH).
Many are also eyeing the relatively cheaply valued financial sector, especially with the upcoming earnings season, as observers have looked to positive catalysts that could bolster growth in the sector, such as promises of deregulation and corporate tax cuts, along with a tighter Federal Reserve monetary policy outlook. Investors can utilize leveraged ETFs like the Direxion Daily Financial Bull 3X Shares (NYSEArca: FAS) and Direxion Daily Regional Banks 3x Bull Shares (NYSEArca: DPST).
Additionally, given the rising interest rate environment, fixed-income investors may also incorporate something like the Direxion Daily 7-10 Year Treasury Bear 1x Shares (NYSEArca: TYNS) or Direxion Daily 20-Year Treasury Bear 3X (NYSEArca: TMV) to hedge against weakness in the bond positions and help diminish duration risk.
Financial advisors who are interested in learning more about alternative investment strategies can watch the webcast here on demand.