Image: Bigstock

December was a brutal month for the U.S. stock market. While recession fears triggered by the return of the Fed’s hawkish tone and rising COVID-19 cases in China resulted in risk-off trading, a round of strong economic data lent some support to stocks.

This led to higher demand for leveraged and inverse-leveraged ETFs, as these fetched outsized returns on quick market turns. Here, we highlight a bunch of the best-performing leveraged or inverse leveraged ETFs that gained double digits in December.

These include Direxion Daily CSI China Internet Index Bull 2X Shares (CWEB - Free Report), Direxion Daily TSLA Bear 1X Shares (TSLS - Free Report), MicroSectors Travel -3x Inverse Leveraged ETN (FLYD - Free Report), MicroSectors Gold Miners 3X Leveraged ETN (GDXU - Free Report), and Direxion Daily S&P Oil & Gas Exp. & Prod. Bear 2X Shares (DRIP - Free Report).

These will remain investors’ darlings in 2023, provided the sentiments remain volatile.

The Federal Reserve raised interest rates by 50 bps in December to 4.25-4.50%, the highest level in 15 years, and revealed a hawkish view for 2023. This marked the seventh rate hike last year in an unprecedented move to rein in inflation.

The central bank now projects at least a 75 bps rate hike, peaking at 5.1% by the end of 2023, 50 bps higher than the 4.6% projected back in September. The rate will then be cut to 4.1% in 2024.

The hike came despite the fact that inflation has been cooling down gradually. The consumer price index jumped 7.1% year-over-year in November, down from a 7.7% year-over-year increase in October and a recent peak of 9.1% in June. This represents the lowest annual increase since late 2021.

Additionally, the latest bouts of data indicate an improving economy. The economy added 263,000 jobs in November, marking another strong month of job growth. The unemployment rate remained at 3.7%, close to a 50-year low, while average hourly earnings jumped 0.6% from October..

Meanwhile, business activity jumped the most since March 2021 in November, suggesting that the largest part of the economy remains resilient. ISM’s gauge of services rose to 56.5 in November from 54.4 in October.

Further, Americans have regained confidence in the U.S. economy, with consumer confidence bouncing back in December and reversing consecutive declines in October and November to reach its highest level since April, per the University of Michigan's Consumer Confidence Index. The Conference Board Consumer Confidence Index climbed to 108.3 from 101.4 in November.

Leveraged and Inverse-Leveraged ETFs

Leveraged and inverse-leveraged ETFs either create a leveraged long/short position, an inverse long/short position, or a leveraged inverse long/short position in the underlying index through the use of swaps, options, futures contracts, and other financial instruments. Due to their compounding effect, investors can enjoy higher returns in a short period, provided the trend remains a friend. See all the Inverse Equity ETFs here.

However, these funds run the risk of huge losses compared to traditional funds in fluctuating or seesawing markets. Further, their performance could vary significantly from the actual performance of their underlying index over a longer period when compared to a shorter period (such as weeks or months).

Investors should note that these products are suitable only for short-term traders as these are rebalanced on a daily basis. Further, liquidity can be a big problem as it can make the products more expensive than they appear.

Direxion Daily CSI China Internet Index Bull 2X Shares (CWEB - Free Report) – Up 49.9%

The Direxion Daily CSI China Internet Index Bull 2X Shares ETF offers twice the leveraged exposure to China’s Internet market by tracking the CSI Overseas China Internet Index. It charges an annual fee of 88 bps, and it trades in an average daily volume of about 8.2 million shares. The Direxion Daily CSI China Internet Index Bull 2X Shares ETF has accumulated AUM of $355.7 million.

Direxion Daily TSLA Bear 1X Shares (TSLS - Free Report) – Up 49.2%

The Direxion Daily TSLA Bear 1X Shares ETF seeks daily investment results of 100% of the inverse of the performance of the common shares of Tesla (TSLA). This inverse single-stock ETF tracks the price of a single stock rather than an index, eliminating the benefits of diversification.

The Direxion Daily TSLA Bear 1X Shares ETF has accumulated $47.5 million in its asset base, and it trades in an average daily volume of 379,000 shares. It charges 95 bps in fees per year.

MicroSectors Travel -3x Inverse Leveraged ETN (FLYD - Free Report) – Up 26.2%

The MicroSectors Travel -3x Inverse Leveraged ETN offers three times (3X or 300%) inverse exposure to the performance of the MerQube MicroSectors U.S. Travel Index, which measures the performance of large, liquid, U.S. listed, and domiciled companies operating in the RBICS Sub Industries related to travel and tourism.

It has gathered $2.3 million in its asset base since its debut six months ago. The MicroSectors Travel -3x Inverse Leveraged ETN charges 95 bps in fees per year, and it trades in an average daily volume of 7,000 shares.

MicroSectors Gold Miners 3X Leveraged ETN (GDXU - Free Report) – Up 16.7%

The MicroSectors Gold Miners 3X Leveraged ETN seeks to deliver three times (3X or 300%) the performance of the S-Network MicroSectors Gold Miners Index. It has amassed $117.8 million in its asset base since its debut last December, and it charges 95 bps in annual fees. The MicroSectors Gold Miners 3X Leveraged ETN trades in an average daily volume of 375,000 shares.

Direxion Daily S&P Oil & Gas Exp. & Prod. Bear 2X Shares (DRIP - Free Report) – Up 16%

The Direxion Daily S&P Oil & Gas Exp. & Prod. Bear 2X Shares ETF seeks two times inverse exposure to the performance of the S&P Oil & Gas Exploration & Production Select Industry Index.

The Direxion Daily S&P Oil & Gas Exp. & Prod. Bear 2X Shares ETF has amassed $90.3 million in its asset base, and it trades in solid volume of around 16.6 million shares a day on average. The fund charges 95 bps in annual fees.

More By This Author: