The third quarter of 2024 was extremely volatile for the U.S. stock market. While recession fears, geopolitical tensions, fading AI craze and uncertainty surrounding the elections kept investors on edge, rate-cut optimism buoyed the stock market during the quarter. Investors shunned technology stocks in favor of smaller companies and other sectors, which are bigger beneficiaries of Fed rate cuts.
With just a day left to end the third quarter, the Dow Jones outperformed, rising 8.2%, while the S&P 500 Index and tech-heavy Nasdaq Composite gained 4.2% and 2.2%, respectively.
This has resulted in a huge demand for leveraged ETFs as investors look to register big gains in a short span. We have highlighted a bunch of the best-performing leveraged equity ETFs that have gained 50% or more in the third quarter. These include Direxion Daily Homebuilders & Supplies Bull 3X Shares NAIL, MicroSectors Gold Miners 3X Leveraged ETN GDXU, Direxion Daily MSCI Real Estate Bull 3X Shares DRN, Direxion Daily Regional Banks Bull 3x Shares DPST and Direxion Daily Utilities Bull 3X Shares UTSL.
These funds seek to register big gains in a short span and will continue their strong trend, at least in the near term, provided the sentiments remain bullish.
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.
After holding rates at a 23-year high for 14 consecutive months since July 2023, Federal Reserve Chair Jerome Powell kicked off the new rate cycle era by initiating a 50 basis points cut in interest rates. This marked the first rate cut since 2020 to address slowing economic growth. The central bank projects two more rate cuts of 50 bps in its final two meetings this year, due in November and December. It also indicates another 100-bps rate cut next year and a 50-bps cut in 2026, which means four rate cuts in 2025 and two in 2026 (read: Fed Initiates Rate Cuts: Top-Ranked Growth ETFs to Buy).
Lower rates lead to reduced borrowing costs for mortgages, credit cards and other consumer and business loans. This helps businesses to expand their operations more easily, resulting in increased profitability. This, in turn, stimulates economic growth and boosts the stock market. Lower rates primarily benefit cyclical sectors like industrials, financials and consumer discretionary. Securities in capital-intensive sectors like telecom will also benefit from lower rates as businesses will face lower loan rates over time.
Additionally, lower rates raise the yellow metal’s attractiveness when interest rates fall compared to fixed-income assets such as bonds, as the precious metal does not pay interest like fixed-income assets.
ETFs in Focus
Direxion Daily Homebuilders & Supplies Bull 3X Shares (NAIL) - Up 73.5%
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, charging an annual fee of 93 bps. Direxion Daily Homebuilders & Supplies Bull 3X Shares trades in a good average daily volume of about 480,000 shares and has accumulated $362.9 million in its asset base.
MicroSectors Gold Miners 3X Leveraged ETN (GDXU) – Up 57.4%
MicroSectors Gold Miners 3X Leveraged ETN seeks to deliver three times the performance of the S-Network MicroSectors Gold Miners Index. It has amassed $446.8 million in its asset base and charges 95 bps in annual fees. MicroSectors Gold Miners 3X Leveraged ETN trades in an average daily volume of 845,000 shares (read: Gold Mining ETFs Soar on Record Bullion Price).
Direxion Daily MSCI Real Estate Bull 3X Shares (DRN) – Up 52.1%
Direxion Daily MSCI Real Estate Bull 3X Shares seeks to deliver three times the performance of the Real Estate Select Sector Index. It has AUM of $122.1 million and charges 95 bps in annual fees. DRN trades in an average daily volume of 2 million shares.
Direxion Daily Regional Banks Bull 3x Shares (DPST) - Up 49.9%
Direxion Daily Regional Banks Bull 3x Shares seeks to deliver thrice the returns of the S&P Regional Banks Select Industry Index, charging 90 bps in fees per year. DPST has accumulated $773.1 million in its asset base and trades in a moderate volume of around 1.3 million shares a day on average (read: Can Bank ETFs Gain Hugely Amid Rate-Cut Cycle?).
Direxion Daily Utilities Bull 3X Shares (UTSL) – Up 49.8%
With AUM of $56.9 million, Direxion Daily Utilities Bull 3X Shares offers three times exposure to the performance of the Utilities Select Sector Index. It charges investors an annual fee of 95 bps and trades in a lower average daily volume of 176,000 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 (see: all the Leveraged Equity ETFs here).
Still, for ETF investors bullish on these sectors for 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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Direxion Daily Real Estate Bull 3X Shares (DRN): ETF Research Reports
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