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Wall Street ended the second quarter on a high note amid bouts of volatility triggered by rising inflation. The S&P 500 and the Dow Jones are up 8.1% and 3.4%, respectively, for the quarter while Nasdaq Composite Index outperformed with 11.2% gains.

The rally was driven by optimism surrounding the economic recovery. With millions of Americans fully vaccinated, and business and economy opening up, consumer confidence has risen, resulting in speedy economic recovery. Notably, U.S. consumer confidence jumped to a fresh pandemic high in June while a measure of U.S. factory activity climbed to a record high, bolstering economists' expectations of double-digit growth in the second quarter.

Additionally, an expanded stimulus, a huge infrastructure package, signs of job growth, and strong corporate earnings are acting as strong catalysts for the stocks. Further, tech stocks, which were badly hit by inflation fears, also roared back, rekindling investors’ interest in the growth ones.

The Fed views inflation as temporary. The latest personal consumption expenditures data shows that underlying inflation rose less than expected in May, easing worries about the sudden tapering in stimulus. The University of Michigan consumer survey’s one-year inflation expectation also dropped to 4.2% in June from a decade-high 4.6% in May while the five-to-10-year inflation expectation fell to 2.8% this month from 3.0% in May.

All this has resulted in huge demand for leveraged ETFs as investors seek to register big gains in a short span. Leveraged funds provide multiple exposure (2X or 3X) to the daily performance of the underlying index by employing various investment strategies such as swaps, futures contracts, and other derivative instruments. Due to their compounding effect, investors can enjoy higher returns in a very short period of time, provided the trend remains positive.

Below we highlight the five best-performing leveraged equity ETFs from different corners of the market that piled up huge gains in the second quarter. These funds will continue to be investors’ darlings, provided the sentiments remain bullish.

Daily Dow Jones Internet Bull 3X Shares (WEBL - Free Report) – Up 49.1%

This fund provides three times leveraged play on the Internet corner of the broad technology sector by tracking the Dow Jones Internet Composite Index. It has attracted $84.3 million in its asset base and charges 95 bps in annual fees. The product sees an average daily volume of 68,000 shares.

BMO REX MicroSectors FANG+ Index 3X Leveraged ETN (FNGU - Free Report) – Up 45%

This note seeks to offer three times leveraged exposure to the NYSE FANG Index, charging 95 bps in annual fees. The ETN has accumulated $1.9 billion in its asset base and trades in an average daily volume of 4.1 million shares.

Direxion Daily Cloud Computing Bull (CLDL - Free Report) – Up 41.4%

This ETF offers two times leveraged exposure to the Indxx USA Cloud Computing Index. The product has amassed about $27.8 million in its asset base while charging 95 bps in fees per year. It exchanges around 17,000 shares a day on average.

ProShares UltraPro QQQ (TQQQ - Free Report) – Up 40.9%

It offers thrice the returns of its daily performance of the NASDAQ-100 Index while charging 95 bps in annual fees from investors. The fund amassed $11.9 billion in AUM and trades in a heavy volume of 29.9 million shares, on average.

Direxion Daily Technology Bull 3x Shares (TECL - Free Report) — Up 40.7%

This ETF targets the broad technology sector with three times exposure to the Technology Select Sector Index. It has AUM of $2.2 billion and charges 95 bps in fees per year. Volume is good as it exchanges around 1.9 million shares a day, on average.

Bottom Line

While this strategy is highly beneficial for short-term traders, it could lead to huge losses compared to the traditional funds in fluctuating or seesawing markets. Further, the funds’ performance could vary significantly from the actual performance of their underlying index over a longer period when compared to the shorter period (such as weeks or months) due to their compounding effect.