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December was marked by heightened volatility for Wall Street. Despite this, the S&P 500 and the Dow Jones hit a new peak, with the former topping a new milestone of 4,800 and Nasdaq Composite Index close to new highs. Although inflationary fears and the rapidly spreading Omicron variant of COVID-19 have kept investors jittery, strong consumer confidence and a holiday sales surge have driven the market higher.

This has resulted in huge demand for leveraged ETFs as investors seek to register big gains in a short span. Here we highlight a bunch of the best-performing leveraged equity ETFs from different corners of the market that gained in double-digits in December.

These include Direxion Daily Healthcare Bull 3X Shares (CURE - Free Report), Direxion Daily Homebuilders & Supplies Bull 3X Shares (NAIL - Free Report), Direxion Daily Utilities Bull 3X Shares (UTSL - Free Report), Direxion Daily Cloud Computing Bear 2X Shares (CLDS - Free Report), and ProShares Ultra Telecommunications (LTL - Free Report). These funds will continue to be investors’ darlings, provided the sentiments remain bullish.

Holiday retail sales surged the most in nearly two decades, powered by soaring e-commerce sales as well as a rush to stores amid supply chain concerns, rising inflation, and the raging new COVID-19 variant.

U.S. consumer confidence rose further in December, suggesting that the economy would continue to expand in 2022 despite a resurgence in COVID-19 infections and reduced fiscal stimulus. Meanwhile, President Biden’s administration took steps to eliminate supply-chain bottlenecks, indicating that higher inflation will not last very long.

In another encouraging development, the Food and Drug Administration granted approval for oral antiviral COVID-19 pills to Pfizer (PFE) and Merck (MRK), making them the first and second at-home treatments, respectively, for coronavirus and a potentially important tool in the fight against the fast-spreading Omicron variant.

Additionally, the central bank plans to buy $60 billion per month of bonds in combined Treasuries and agency mortgage-backed securities starting in January, down from $90 billion in December and $120 billion from the start of the pandemic through November. The move indicates a solid U.S. economy despite higher inflation.

The Santa Claus rally added to the strength. Per MarketWatch, the Santa Claus rally had the best start in 20 years with the S&P 500 notching its 69th record of 2021.

A Santa Claus rally refers to the increase in stock prices in the final week of the calendar year (i.e., between Christmas and New Year’s Day) that extends into the first two days of the New Year. The S&P 500 has averaged a 1.3% gain over this period every year since 1969, per The Stock Trader’s Almanac. According to Sundial Capital Research, the S&P 500 has gained an average of 2.66% over the past 92 years with positive returns 77% of the time.

Leveraged ETFs

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.

However, these funds run the risk of huge losses compared to traditional funds in fluctuating or seesawing markets. Furthermore, 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 they are rebalanced on a daily basis. Further, liquidity can be a big problem as it can make the products more expensive than what they appear.

We profiled these ETFs in detail below.

Direxion Daily Healthcare Bull 3X Shares (CURE - Free Report) – Up 22.7%

Direxion Daily Healthcare Bull 3X Shares creates three times leveraged long position in the Health Care Select Sector Index. It charges 95 bps in fees a year. Direxion Daily Healthcare Bull 3X Shares has $272.3 million in AUM and trades in volumes of 84,000 shares on average.

Direxion Daily Homebuilders & Supplies Bull 3X Shares (NAIL - Free Report) - Up 18.7%

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.

Direxion Daily Homebuilders & Supplies Bull 3X Shares charges an annual fee of 95 bps and trades in an average daily volume of about 320,000 shares. The fund has accumulated $399.7 million in its asset base.

Direxion Daily Utilities Bull 3X Shares (UTSL - Free Report) – Up 18.3%

With AUM of $30.7 million, Direxion Daily Utilities Bull 3X Shares offers three times exposure to the performance of the Utilities Select Sector Index. Direxion Daily Utilities Bull 3X Shares charges investors an annual fee of 95 bps and trades in a lower average daily volume of 73,000 shares.

Direxion Daily Cloud Computing Bear 2X Shares (CLDS - Free Report) - Up 13.8%

Direxion Daily Cloud Computing Bear 2X Shares targets the cloud-computing segment of the broad technology sector, offering two times inverse exposure to the performance of the Indxx USA Cloud Computing Index.

With AUM of $16.2 million, Direxion Daily Cloud Computing Bear 2X Shares has an expense ratio of 0.95% and trades in an average daily volume of 3,000 shares.

ProShares Ultra Telecommunications (LTL - Free Report) – Up 13.8%

ProShares Ultra Telecommunications provides two times exposure to the performance of the Dow Jones U.S. Select Telecommunications Index, which offers exposure to providers of fixed-line and mobile telephone services.

ProShares Ultra Telecommunications has amassed $2.7 million in its asset base and charges 95 bps in annual fees. It trades in an average daily volume of nearly 2,000 shares.