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The year 2021 has been a grand one for the U.S. stock market though bouts of volatility and uncertainty continue to threaten the bulls. This is especially true as the major indices have reached a series of record highs on the back of an improving economy and return of strong corporate earnings growth.

This has resulted in huge demand for leveraged ETFs as investors seek to register big gains in a short span. We highlight a bunch of the best-performing leveraged equity ETFs from different corners of the market that more than doubled in 2021. These include MicroSectors U.S. Big Oil Index 3X Leveraged ETN (NRGU - Free Report), Direxion Daily Homebuilders & Supplies Bull 3X Shares (NAIL - Free Report), Direxion Daily Financial Bull 3x Shares (FAS - Free Report), and Daily S&P 500 High Beta Bull 3X Shares (HIBL - Free Report). These funds will continue to be investors’ darlings, provided the sentiments remain bullish.

A massive vaccination drive, an expanded stimulus, and huge infrastructure spending have helped the economy to recover from the pandemic lows. This has resulted in reopening economies and businesses, a healing labor market as well as rising consumer confidence. The Fed’s tapering announcement added to the strength. 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 consumer price index (“CPI”) jumped 6.8% year over year in November, the highest level since June 1982 when inflation hit 7.1%. The economy is nearing full employment, with the unemployment rate dropping to a pandemic-era low of 4.2%.

With just a couple of weeks left to end the year, the S&P 500 is up 24.3% while the Dow Jones and the Nasdaq have gained 17.3% and 17.8%, respectively.

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. 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 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 ETFs in detail below:

MicroSectors U.S. Big Oil Index 3X Leveraged ETN (NRGU) – Up 151.8%

MicroSectors U.S. Big Oil Index 3X Leveraged ETN provides three times leveraged exposure to the Solactive MicroSectors U.S. Big Oil Index, which is equal-dollar weighted and provides exposure to the 10 largest U.S. energy and oil companies.

MicroSectors U.S. Big Oil Index 3X Leveraged ETN has been able to manage $573.4 million in its asset base while trading in an average daily volume of 317,000 shares. Expense ratio comes in at 0.95%.

Direxion Daily Homebuilders & Supplies Bull 3X Shares (NAIL) - Up 64.1%

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 a good average daily volume of about 342,000 shares. The fund has accumulated $404.8 million in its asset base.

Direxion Daily Financial Bull 3x Shares (FAS) – Up 118.7%

Direxion Daily Financial Bull 3x Shares provides three times exposure to the performance of the Russell 1000 Financial Services Index, which offers exposure to companies in banking, mortgage finance, consumer finance, specialized finance, investment banking and brokerage, asset management and custody, corporate lending, insurance, financial investments, and real estate, including real estate investment trusts.

Direxion Daily Financial Bull 3x Shares has amassed $3.4 billion in its asset base and charges 94 bps in annual fees. It trades in an average daily volume of nearly 1.4 million shares.

Daily S&P 500 High Beta Bull 3X Shares (HIBL) – Up 100.4%

Daily S&P 500 High Beta Bull 3X Shares offers three times exposure to the performance of the S&P 500 High Beta Index. The index selects 100 securities to include in the index from the S&P 500 Index that have the highest sensitivity to market movements, or “beta” over the past 12 months.

Daily S&P 500 High Beta Bull 3X Shares has gathered $107 million in its asset base and trades in an average daily volume of 74,000 shares. The fund charges 95 bps in fees per year from its investors.