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The technology sector has staged a strong comeback this year and is once again dominating the stock market rally. The hype surrounding artificial intelligence (AI), easing inflation, upbeat corporate earnings, and investors’ flight to mega-cap tech stocks have been driving the sector higher.

Based on data from BofA Global Investment Strategy, U.S. tech stocks are enjoying their greatest outperformance, relative to the S&P 500, in 97 years. This has resulted in a huge rally for leveraged ETFs, with funds targeting FANG stocks and single stocks more than doubling this year. These funds seek to register big gains in a short span.

Leveraged ETFs

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. Due to their compounding effect, investors can enjoy higher returns in a very short period of time, provided the trend remains a friend.

Since most of these ETFs seek to attain their goals on a daily basis, their performance could vary significantly from the performance of their underlying index or benchmark over a longer period when compared to a shorter period (such as weeks, months or years) due to their compounding effect.

Investors should also note that leveraged ETFs involve a great deal of risk when compared to traditional funds. They are often more costly and can be less tax-efficient, as they can see capital gains through the use of swaps and other derivative instruments.

Solid Sector Fundamentals

Investors are now more confident in the sector's ability to deliver strong growth. This is especially true as the mega-cap tech stocks have strong balance sheets, durable revenue streams and robust profit margins, making them attractive investments. They are better positioned to withstand a possible economic downturn. Additionally, some high-profile tech companies have demonstrated improved cost discipline, leading to better-than-expected earnings improvement.

Additionally, AI has emerged as a significant driver of mega-cap tech's outperformance in recent weeks. The hype around AI has created a positive sentiment around key tech stocks like Nvidia (NVDA) and Microsoft (MSFT). In fact, the five biggest stocks on the S&P 500 — Nvidia, Microsoft, Amazon (AMZN), Alphabet (GOOGL), and Apple (AAPL) — are from the tech sector and now worth nearly $9 trillion. These together account for almost 25% of the S&P 500.

The tech leadership is further supported by moderating U.S. inflation and bets that the Fed is nearing the end of its interest rate hiking cycle. As the tech sector relies on borrowing for superior growth, it is cheaper to borrow more money for further initiatives when interest rates are low.

Moreover, the sector outlook remains solid given that the global digital shift has accelerated e-commerce for everything, ranging from remote working to entertainment and shopping. The rapid adoption of cloud computing, big data, the Internet of Things, wearables, VR headsets, drones, virtual reality, machine learning, digital communication, blockchain, and 5G technology will continue to fuel a rally.

ETFs on Surge

FANG ETFs

MicroSectors FANG+ Index 3X Leveraged ETN (FNGU - Free Report), MicroSectors Solactive FANG & Innovation 3X Leveraged ETN (BULZ - Free Report), and MicroSectors FANG+ Index 2X Leveraged ETN (FNGO - Free Report) have more than doubled this year. Direxion Daily NYSE FANG+ Bull 2X Shares (FNGG - Free Report) has doubled so far.  

FNGU, FNGO, and FNGG track the NYSE FANG+ Index, which is an equal-dollar weighted index designed to track the performance of 10 highly-traded growth stocks of technology and tech-enabled companies. BULZ follows the Solactive FANG Innovation Index, which includes 15 highly liquid stocks focused on building tomorrow’s technology today. These large, tech-enabled equity securities are all listed and domiciled in the United States.

Single-Stock ETFs

GraniteShares 1.5x Long NVDA Daily ETF NVDL and GraniteShares 1.5x Long Meta Daily ETF FBL are the winners, skyrocketing 192.7% and 180%, respectively. The former offers 1.5 times (150%) the daily percentage change of the common stock of NVIDIA, while the latter tracks the 1.5 times the performance of the stock of Meta Platforms.

GraniteShares 1.75x Long AAPL Daily ETF (AAPB - Free Report) and Direxion Daily AAPL Bull 1.5X Shares (AAPU - Free Report) measures 1.75 times (175%) and 1.5 times the daily percentage change of the common stock of Apple. Both ETFs have climbed 61.4% and 52.5%, respectively. Direxion Daily MSFT Bull 1.5X Shares ETF (MSFU - Free Report), offering 1.5 times exposure to Microsoft stock, is up 49%.

Broad Tech ETFs

Direxion Daily Technology Bull 3X Shares (TECL - Free Report) targets the broad technology sector with three times exposure to the Technology Select Sector Index. It has gained 86.7% so far this year.

Semiconductor, Internet & AI ETFs

Direxion Daily Semiconductor Bull 3x Shares (SOXL - Free Report) and ProShares Ultra Semiconductors (USD - Free Report) targets the semiconductor corner of the broad technology with three times and two times exposure, respectively. These ETFs has gained about 83% each. Direxion Daily Dow Jones Internet Bull 3X Shares (WEBL - Free Report) provides three times the performance of the Dow Jones Internet Composite Index. It has returned 62.5% so far this year.

Direxion Daily Robotics, Artificial Intelligence & Automation Index Bull 2X Shares (UBOT - Free Report) is the leveraged ETF play targeting the AI segment. It offers two times the performance of the Indxx Global Robotics and Artificial Intelligence Thematic Index and is up 58.8%.

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