Outperforming Leveraged ETFs Leverage Compounding Benefits

In a steady bull market environment, with equities pushing toward new highs and volatility relatively subdued, leveraged ETFs have been outperforming their underlying triple leveraged or 3x strategies.

For example, the post-Trump, growth-oriented rally has fueled record gains in the technology segment, and more aggressive traders have capitalized on the advance through triple leveraged tech-related ETFs, such as the Direxion Daily Technology Bull 3X Shares (NYSEArca: TECL). TECL takes the leveraged 300% daily exposure of the Technology Select Sector Index, surged 95.6% year-to-date, or more than triple the 27.4% gain in the underlying benchmark.

Similarly, the semiconductor segment has been one of the best performing areas of the market, with the Direxion Daily Semiconductors Bull 3x Shares (NYSEArca: SOXL), which takes the leveraged 300% daily exposure of the PHLX Semiconductor Sector Index, jumping 136.6% year-to-date, compared to the 37.6% rise in the underlying index.

Additionally, the renewed interest in international equities, namely developing country exposure, has contributed to significant gains in emerging market equities, with more aggressive traders looking at the Direxion Daily Emerging Markets Bull 3X Shares (NYSEArca: EDC), which takes the leveraged 300% daily exposure of the MSCI Emerging Markets Index. Year-to-date, EDC increased 108.4%, compared to the underlying benchmark’s 31.3% gain.

Potential traders should keep in mind that these leveraged ETFs are designed to produce 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 funds do not perfectly reflect their intended strategies.

“Investors don’t realize that when there is a lot of compounding, their exposure is more than ‘3x,'” Andy O’Rourke, Managing Director and Chief Marketing Officer for Direxion, told ETF trends in a call.