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The month of July marked a change in investors’ sentiment. This is especially true as the leaders of 2024 became the laggards and vice versa due to market rotation. Investors shunned hot technology stocks in favor of smaller companies and the cyclical sectors, which are bigger beneficiaries of Fed rate cuts. 

The Dow Jones Industrial Average, which missed the rally in the first half, outperformed last month. The blue-chip index gained 4.4%, its best month since December. Meanwhile, the S&P 500 advanced 1.1% in July, and the tech-heavy Nasdaq Composite Index dropped 0.8% amid the steep decline in “Mag 7”.

This has resulted in a huge demand for leveraged ETFs as investors look to register big gains in a short span. We highlight a bunch of best-performing leveraged equity ETFs from different corners of the market that were leaders in their segments in July. 

These include Direxion Daily Homebuilders & Supplies Bull 3X Shares (NAIL), Direxion Daily Regional Banks Bull 3x Shares (DPST), Direxion Daily Small Cap Bull 3x Shares (TNA - Free Report), MicroSectors Gold Miners 3X Leveraged ETN (GDXU), and Direxion Daily Electric and Autonomous Vehicles Bull 2X Shares (EVAV). These funds will continue to be investors’ darlings, at least in the near term, provided the sentiments remain bullish.

Leveraged ETFs provide multiple exposures (2X or 3X) to the daily performance of the underlying index. These funds employ various investment strategies, such as the use of swaps, futures contracts and other derivative instruments to accomplish their objectives.

The world's biggest economy’s growth has been resilient amid 23-year high interest rates and GDP accelerated in the second quarter, primarily driven by solid consumer spending and higher business investment. Inflation showed the first monthly drop since 2020 and the slowest annual price gain since March 2021. All these deepened the market’s confidence that the Fed would begin cutting interest rates in September. In the meeting this week, Fed Chairman Jerome Powell bolstered the confidence in a September interest-rate cut, saying it "could be on the table.”

The market rally is broadening beyond the technology sector as a rate cut will benefit the companies with higher financing costs. Small-cap companies have a higher level of debt, and lower rates generally lead to reduced borrowing costs. This helps small businesses expand their operations more easily and increases profitability. Cyclical stocks, which are heavily reliant on borrowing costs, also got a boost compared to cash-rich, mega-cap technology stocks, which have been riding a wave of optimism around artificial intelligence.

ETFs in Focus
 

Direxion Daily Homebuilders & Supplies Bull 3X Shares - Up 62.8%

Direxion Daily Homebuilders & Supplies Bull 3X Shares provides leveraged exposure to homebuilders. It creates a three-times-long position in the Dow Jones U.S. Select Home Construction Index, charging an annual fee of 93 bps. Direxion Daily Homebuilders & Supplies Bull 3X Shares trades in a good average daily volume of about 393,000 shares and has accumulated $396.2 million in its asset base.

Direxion Daily Regional Banks Bull 3x Shares - Up 61.2%

Direxion Daily Regional Banks Bull 3x Shares seeks to deliver thrice the returns of the S&P Regional Banks Select Industry Index, charging 90 bps in fees per year. DPST has accumulated $985.5 million in its asset base and trades in a moderate volume of around 1.6 million shares a day on average. 

Direxion Daily Small Cap Bull 3x Shares - Up 31.4%

Direxion Daily Small Cap Bull 3x Shares offers triple exposure to the small-cap space by tracking the Russell 2000 Index, charging 91 bps in fees and expenses. It has amassed $3 billion in its asset base and sees a solid volume of 18 million shares a day on average.

MicroSectors Gold Miners 3X Leveraged ETN – Up 30.9%

MicroSectors Gold Miners 3X Leveraged ETN seeks to deliver three times the performance of the S-Network MicroSectors Gold Miners Index. It has amassed $346 million in its asset base and charges 95 bps in annual fees. MicroSectors Gold Miners 3X Leveraged ETN trades in an average daily volume of 827,000 shares.

Direxion Daily Electric and Autonomous Vehicles Bull 2X Shares - Up 29.2%

Direxion Daily Electric and Autonomous Vehicles Bull 2X Shares seeks to track two times the performance of the Indxx US Electric and Autonomous Vehicles Index. It has accumulated $5 million in its asset base. Direxion Daily Electric and Autonomous Vehicles Bull 2X Shares charges 95 bps in annual fees and trades in an average daily volume of 14,000 shares.

Bottom Line
 

As a caveat, investors should note that these products are extremely volatile and suitable only for short-term traders. Additionally, the daily rebalancing — when combined with leverage — may make these products deviate significantly from the expected long-term performance figures.

Still, for ETF investors bullish on these sectors for the near term, either of the above products can be an interesting choice. Clearly, a near-term long could be intriguing for those with high-risk tolerance and a belief that the trend is the friend in this corner of the investing world.

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