The year 2014 so far has been mixed for the global market given uncertain growth in the emerging markets, slowdown in the Chinese economy, Fed tapering policy, and number of good and bad economic data across the globe.
While escalating tension in Russia and the prospect of interest rate hikes sooner than expected are currently pushing the global markets down, some upbeat global economic indicators, increasing consumer confidence, and a healing U.S. job market are acting as tailwinds.
Given higher volatility in the stock market, investors are embracing leverage/inverse ETPs this year for big gains in a short period. As per Boost ETP, AUM of global leverage/inverse products stood at a record $61.3 billion at the end of February, up 6% from the year-ago month. About 65% of AUM comes from leverage/inverse equity ETPs, 22% from debt, 7% from commodities, and the rest from currency and alternative ETPs.
In fact, these products have provided outsized gains (over 50%) just within the three months of the year, though these involve a great deal of risk when compared to traditional products. Below, we have highlighted four leverage/inverse ETPs that have been crushing the market from the year-to-date look but with much greater volatility. This trend might continue at least for the near term if the global sentiments remain volatile.
These products either create a leveraged long/short position or inverse long/short position or leveraged inverse long/short position in the underlying index through the use of swaps, options, future contracts and other financial instruments.
Direxion Daily Russia Bear 3X Shares (RUSS.K)
This fund seeks to deliver thrice (3x or 300%) the inverse (or opposite) performance of the Vectors Russia Index. The benchmark measures the performance of the stocks that are domiciled and primarily listed on an exchange in Russia or generate at least 50% of their revenues in Russia.
Energy firms take the top spot at 41% while materials, telecom and financials round off to the next three with double-digit exposure. About three-fifths of the portfolio is tilted toward large cap stocks. The fund has amassed $25.7 million in its asset base while charging 95 bps in fees and expenses. It trades in moderate volume of less than a million shares a day and has returned about 84% so far this year.
Direxion Daily Junior Gold Miners Index Bull 3x Shares (JNUG)
This fund seeks to deliver thrice the performance of the Market Vectors Junior Gold Miners Index. The benchmark provides exposure to the largest and most liquid small-cap companies that derive more than half of their revenues from gold mining. Canadian firms dominate the return at 64%, followed by Australia (20%) and the U.S. (9%).
The ETF has accumulated $64 million in its AUM since its debut last October. Average trading volume is good, exchanging about 276,000 shares a day while expense ratio came in at 0.95%. JNUG is up nearly 77% in the year-to-date time frame.
Direxion Daily Gold Miners Bull 3X Shares (NUGT.K)
This product seeks to deliver thrice the daily performance of the NYSE Arca Gold Miners Index, which consists of firms that operate globally in both developed and emerging markets, and are involved primarily in the exploration and production of gold. Here again, Canada takes the top spot at 63% while the U.S. (13%) and South Africa (9%) round off to the top three.
The fund is rich with AUM of $755.7 million and average daily volume of around 5.3 million. It charges investors 95 bps in annual fees and expenses. The ETF is up over 62% so far this year.
PowerShares DB Base Metals Short ETN (BOS)
This ETN provides inverse exposure to the daily performance of the Deutsche Bank Liquid Commodity Index – Optimum Yield Industrial Metals – which seeks to measure the performance of underlying futures contracts on Aluminum, Copper and Zinc .
In particular, aluminum accounts for 36% share, closely followed by copper (35%) and zinc (29%). The note is unpopular and illiquid with AUM of just $2.5 million and average daily volume of under 3,000 shares. The product charges 0.75% in expense ratio and has returned over 57.5% in the year-to-date time frame.
Bottom Line
As a caveat, investors should note that these products are suitable only for short-term traders as these are rebalanced on a daily basis.
Still, for ETF investors who want to tap both upturns and downturns in the global market in the near term, either of the above products could make an interesting choice. Clearly, a near-term leveraged/inverse could be intriguing for those with high-risk tolerance, and a belief that the “trend is your friend” in this corner of the investing world.