Image: Bigstock

October was the best month of this year for Wall Street. All the three main indices soared on earnings optimism. The S&P 500 and the Nasdaq Composite Index notched their best months since November 2020, gaining around 7% each. The Dow Jones surged nearly 6% in October, its best monthly gain since March.

Notably, earnings from 55.9% of the S&P 500 companies reported so far are up 39.2% on 17.8% revenues with 82.1% beating EPS estimates and 73.5% beating revenue estimates.

Additionally, rounds of upbeat data uplifted investor sentiment. U.S. consumer confidence rose in October after three straight declines, while retail sales unexpectedly rose 0.7% in September, suggesting that Americans continued to spend at a solid clip despite the rising inflation. Meanwhile, consumer spending accelerated in August even as soaring demand and snarled supply chains kept inflation high. All these data helped to drive investors’ sentiment along with earnings strength.

The combination of factors 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 some best-performing leveraged equity ETFs from different corners of the market that gained more than 25% in October. These funds will continue to be investors’ darlings, provided the sentiments remain bullish.

Direxion Daily Transportation Bull 3X Shares (TPOR - Free Report) – Up 37.5%

TPOR targets the transportation sector and seeks to deliver three times the daily performance of the Dow Jones Transportation Average Index. The product has AUM of $86.8 million and charges 95 bps in fees and expenses. It trades in lower volumes of about 119,000 shares per day.

Direxion Daily Consumer Discretionary Bull 3X Shares (WANT - Free Report) – Up 36.1%

This ETF seeks to offer three times exposure to the Consumer Discretionary Select Sector Index, charging 95 bps in annual fees. It has AUM of $52.8 million and an average daily volume of 23,000 shares.

Direxion Daily Global Clean Energy Bull 2X Shares (KLNE - Free Report) – Up 33.3%

This fund provides two times exposure to the performance of the S&P Global Clean Energy Index, charging investors’ 95 bps in annual fees. It has accumulated $7.1 million in its asset base since its inception in late July and trades in a paltry average daily volume of 3,000 shares.

BMO REX MicroSectors FANG+ Index 3X Leveraged ETN (FNGU - Free Report) – Up 31.3%

This note seeks to offer three times leveraged exposure to the NYSE FANG Index, charging 95 bps in annual fees. The ETN has accumulated $2.2 billion in its asset base and trades in an average daily volume of 2.3 million shares.

Direxion Daily Junior Gold Miners Index Bull 2x Shares (JNUG - Free Report) – Up 26.6%

This product provides two times exposure to the daily performance of the MVIS Global Junior Gold Miners Index. It charges 87 bps in annual fees and has accumulated $559.8 million in its asset base. Volume is heavy, exchanging about 1.2 in shares per day on average.

Direxion Daily Homebuilders & Supplies Bull 3X Shares (NAIL - Free Report) - Up 25.9%

NAIL provides leveraged exposure to homebuilders and creates a three-times-long position in the Dow Jones U.S. Select Home Construction Index. It charges an annual fee of 95 bps and trades in a good average daily volume of about 1.2 million shares. The fund has amassed $379 million in its asset base.

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.