A relentless decline in oil prices and sluggish Chinese economic growth adversely affected the broader markets so far this year. Additionally, weak domestic economic growth along with lackluster corporate earnings results dented investors’ confidence. The S&P 500 and the Dow had registered their biggest monthly losses last month since Aug 2015. Considering their drop from the earlier highs it seems that we are nearing a bear market.

Amid this broader downtrend, the stock market was subjected to gyrations. But what’s in it for active investors? It’s as simple as this – they should cash in on the persistent ups and downs and make money. And the best way to do so is to invest in trading-leveraged equity funds.

What Are Leveraged Funds?

Leveraged funds use borrowed money to increase returns in a short spell of time. For example, if an investor has a mutual fund worth $50,000, then he/she can borrow another $50,000 without utilizing his/her resources. If the value of the fund rises, the profit will be double. On the other hand, the investor will be accountable to creditors if the value goes down.

However, mutual funds are by nature highly liquid. So, if in a fund’s portfolio the proportion of debt to equity increases then the fund becomes less liquid. As per standard rule, the maximum amount of borrowed money a mutual fund can add to its portfolio is 33%. This means that if the value of the portfolio is $1 million then the maximum leverage for the fund will be $333,333.

Leveraged funds use derivative instruments such as options, futures and swaps to uplift performance. These funds generally strive to return a certain multiple of the short-term returns of an equity index. For example, a 2X S&P 500 fund aims to generate twice the returns that the S&P 500 manages to achieve. Leveraged funds are primarily marked “ultra”, “bull” or “2X”.

Benefits of Leveraged Funds

Leveraged funds not only help you making money by utilizing other people’s money but also offer benefits such as diversification. These funds help investors, especially with small investments, to invest in a diversified portfolio of assets in the capital markets. Diversification minimizes risk, while it escalates returns.

These funds also boast of having no per-trade cost. Investors need not incur costs while buying and selling leveraged mutual funds. In addition to this, these funds don’t charge a performance fee. Investors enjoy the benefits of “dollar cost averaging,” where a young investor depositing $5,000 in these funds reaps the same benefits a high net worth individual receives, say by depositing $25,000,000.

The funds also enjoy tax deductions. Since the borrowed money is for income producing investments, the government allows tax deductions from the income. For example, if you have borrowed $5,000 and your borrowing rate is 7.5% then you pay $375 yearly as interest cost. However, if there is a tax rate deduction of 40% then you save about $150.

5 Trading-Leveraged Funds that Active Investors Should Consider Now

Active investors ignore long-term trends, which are at present none too endearing. Instead, they focus on short-term price movements. These investors seek profits from short-term run-ups by using various instruments including technical analysis, ratio analysis and other quantitative measures. So leveraged mutual funds suit them perfectly now.

Apart from the above benefits, leveraged funds are useful for short-term trades since the overall cost of leverage minimizes during short holding periods. Whereas, financing expenses for leveraged funds climb over a longer period of time.

We have shortlisted the top five Trading-Leveraged Funds. They have impressive 3-year and 5-year annualized returns and carry a Zacks Mutual Fund Rank #1 (Strong Buy) or #2 (Buy).

These funds also possess a relatively low expense ratio and the minimum initial investment is within $15,000. A higher minimum investment helps the fund manager to control cash flows, which eventually helps management of assets on a regular basis.

ProFunds Consumer Goods UltraSector Investor (CNPIX - MF report) seeks daily investment results, before fees and expenses that correspond to one and one-half times the daily performance of the Dow Jones U.S. Consumer GoodsSM Index. CNPIX’s 3-year and 5-year annualized returns are 15.3% and 17%, respectively. Annual expense ratio of 1.75% is lower than the category average of 1.99%. CNPIX has a Zacks Mutual Fund Rank #1.

ProFunds Internet UltraSector Investor (INPIX - MF report) seeks daily investment results, before fees and expenses that correspond to one and one-half times the daily performance of the Dow Jones Internet CompositeSM Index. INPIX’s 3-year and 5-year annualized returns are 20% and 16.6%, respectively. Annual expense ratio of 1.57% is lower than the category average of 1.99%. INPIX has a Zacks Mutual Fund Rank #1.

Rydex Nova A (RYANX - MF report) seeks to provide investment results, before fees and expenses that match 150% of the performance of the S&P 500 Index on a daily basis. RYANX’s 3-year and 5-year annualized returns are 13.1% and 12.6%, respectively. Annual expense ratio of 1.52% is lower than the category average of 1.99%. RYANX has a Zacks Mutual Fund Rank #2.

ProFundsUltraSector Health Care Investor (HCPIX - MF report) seeks daily investment results, before fees and expenses that correspond to one and one-half times the daily performance of the Dow Jones U.S. Health CareSM Index. HCPIX’s 3-year and 5-year annualized returns are 22% and 23.6%, respectively. Annual expense ratio of 1.61% is lower than the category average of 1.99%. HCPIX has a Zacks Mutual Fund Rank #2.

ProFunds Bull Investor (BLPIX - MF report) seeks investment results that correspond to the daily performance of the S&P 500 Index. BLPIX’s 3-year and 5-year annualized returns are 8.2% and 8%, respectively. Annual expense ratio of 1.59% is lower than the category average of 1.99%. BLPIX has a Zacks Mutual Fund Rank #2.