S&P 500 May Gain After Mid Election: Leveraged ETFs To Tap

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America will go to the polls today, and this could leave the U.S. government split into Democrats and Republicans. With polls showing Republicans likely to win at least one house of Congress, analysts are speculating a further Washington gridlock.

Whatever the scenario, stocks have historically seen the strongest stretch during the four-year presidential cycle for the fourth quarter and year after mid-term elections. And to benefit from this trend, investors could easily tap the S&P 500 Index with the help of leveraged ETFs. These include ProShares Ultra S&P500 ETF (SSO - Free Report), Direxion Daily S&P 500 Bull 2x Shares (SPUU - Free Report), Direxion Daily S&P 500 Bull 3x Shares (SPXL - Free Report) and ProShares UltraPro S&P500 ETF (UPRO - Free Report).

These funds offer multiple (more than one time) exposure to the index through the use of swaps, options, future contracts and other financial instruments.

The final national NBC News poll of the 2022 midterms shows a highly competitive campaign landscape this midterm. About 48% of likely voters say they prefer a Democratic-controlled Congress as the outcome of Tuesday’s elections, while 47% prefer a Republican-controlled Congress. This is a reversal from October, when 48% preferred a GOP-controlled Congress versus 47% who wanted Democrats in charge.

President Joe Biden took office in 2021 when the economy was benefiting from COVID-19 vaccines that allowed economies to reopen more fully and boosted by the quickly approved and economy-accelerating American Rescue Plan Act. Since then, the economy has deteriorated. Payroll growth is slowing and inflation has surged to the highest level in four decades. Major stock indices have fallen into bear markets and the Federal Reserve has started to raise interest rates aggressively to tame inflation.

History suggests that the S&P 500 gives best returns following U.S. midterms. The S&P 500 has an eight-decade record of rising in the one-year period after midterm elections. According to Dow Jones Market Data, the S&P 500 has returned 0.4% on average on the day of midterm elections since 1970.

The index has ended the Election Day trading session higher 69% of the time during the past 13 midterms. The S&P 500 has a similar track record the day after midterms, with an average gain of 0.4% since 1930. The S&P 500 has posted gains on 74% of such days during that period.

How to Play?

Below, we highlight some of the key differences between each of the ETFs:

ProShares Ultra S&P500 ETF (SSO)

ProShares Ultra S&P500 ETF provides two times (2X) exposure to the S&P 500 Index, charging 89 bps in fees and expenses. It has been able to manage $2.5 billion in its asset base with a daily trading volume of around 6.7 million shares.

Direxion Daily S&P 500 Bull 2x Shares (SPUU)

While Direxion Daily S&P 500 Bull 2x Shares also provides 2X exposure to the index, it charges a lower fee of 63 bps. It has a lower level of $47.2 million in AUM and sees a lower volume of about 66,000 shares a day on average.

Direxion Daily S&P 500 Bull 3x Shares (SPXL)

Direxion Daily S&P 500 Bull 3x Shares creates 3X long position in the S&P 500 Index with an expense ratio of 0.93%. It has AUM of $2.4 billion and trades in an average daily volume of nearly 15 million shares.

ProShares UltraPro S&P500 ETF (UPRO)

ProShares UltraPro S&P500 ETF provides triple leveraged play to the S&P 500 Index, charging 91 bps in fees and expenses. It has been able to manage $2 billion in its asset base with a daily trading volume of around 14.2 million 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 who are bullish on 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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Disclosure: Zacks.com contains statements and statistics that have been obtained from sources believed to be reliable but are not guaranteed as to accuracy or completeness. References to any ...

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