Since the ETFs rebalance on a daily basis, the compounding effect benefits leveraged ETFs in a upward-trending market. In an upward-trending market, compounding can generate longer-term returns that are greater than the sum of the individual daily returns. Similarly, in a downward-trending market, compounding can generate longer-term returns that are less negative than the sum of the individual daily returns.
“RETL is also well-positioned because of its holdings,” notes Direxion. “With the exception of Sears, most of the fund’s top holdings are in specialty retail (56 percent of the Index, to be exact) which has proven more resilient against Amazon than big-box stores with massive amounts of inventory. Guess and Wayfair in particular are standouts within the Index, each showing consistent growth year-over-year between 2016 and 2017. That performance has pushed Guess up 35 percent year-to-date and Wayfair up over 135 percent as of mid-September.”
While trending markets may offer an opportunity to hold leveraged ETFs for longer periods of time to seek gains, users should still be aware of the risks involved with a highly leveraged position and consider trimming some of their recent gains to rebalance a leveraged position back to their initial weights.
For more information on geared products, visit our leveraged ETFs category.