How to Trade 2019’s Best Performing Leveraged Sector ETFs

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How to Trade 2019’s Best Performing Leveraged Sector ETFs

In the first two months of this year, stocks have exploded, recovering the majority of last year’s significant third quarter losses. Investors have flocked to cyclical sectors in particular, cheering a more dovish Federal Reserve, continuing trade talks between the U.S. and China, and a wave of quarterly profits that have above Wall Street’s expectations. These sectors include technology, energy, and real estate. Additionally, it seems like there is less of a possibility that the economy would enter a recession.

Ray Dalio, the founder of Bridgewater Associates, a Connecticut-based hedge fund, wrote: “There has been a move to a softer posture since the markets dropped and Fed policymakers now feel that the economy and inflation are weak.” According to a post on LinkedIn, he said, “I have reduced my probability of a U.S. recession arriving before to the U.S. presidential election to roughly 35%.

Consider employing leveraged exchange-traded funds (ETFs) that are especially made to amplify short-term price swings if you want to profit from 2019’s top-performing industries. As an example, if an index of technology companies increases by 1%, a tracking leveraged ETF that offers three times exposure will increase by 3%. Leveraged ETFs reset daily, thus returns over holding periods longer than one day may not represent the fund’s claimed leverage owing to compounding effects. Traders should be aware of this. Let’s take a look at a few trading strategies for leveraged sector ETFs.

Direxion Daily Technology Bull 3X ETF (TECL)

The 2008-founded Direxion Daily Technology Bull 3X ETF (TECL) aims to provide a daily return that is three times that of the Technology Select Sector Index. The benchmark index includes of U.S. large-cap technology firms such Alphabet Inc., the parent company of Google, Apple Inc. (AAPL), and Microsoft Corporation (MSFT) (GOOGL).The fund is a useful product for all types of short-term trading due to its narrow 0.08% average spread and daily turnover of more than 400,000 shares. As of February 28, 2019, TECL, which has $550.57 million in assets under management (AUM) and pays a dividend yield of 0.39%, has increased 45.76% year to date (YTD). The ETF levies a management fee of 1.17%, which has little effect for brief stays.

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The share price of TECL has increased by over 80% from hitting a low of $68.96 in late December to finish at $123.56 on February 27. Traders seeking entry opportunities should watch for pullbacks to the 20-day simple moving average in this rapidly trending market (SMA).The SMA may then be used as a trailing stop to allow profits run if the fund’s price keeps rising. When the price approaches $130, a place where it can encounter resistance from the 200-day SMA, those who maintain open positions should think about adjusting the stop to the breakeven mark.

Direxion Daily Energy Bull 3X ETF (ERX)

With net assets over $400 million, the Direxion Daily Energy Bull 3X ETF (ERX) seeks to provide a daily investment return that is three times that of the Energy Select Sector Index. Exxon Mobil Corporation (XOM) and Chevron Corporation (CVX), two titans of the energy industry, account for 41.75% of the weighting in the underlying index. This ETF is a popular among energy traders due to its narrow spreads and high liquidity. The fund has an expense ratio of slightly over 1% and a yield of 2.29%. The return on ERX as of February 28, 2019 was 46.27%.

Following a dramatic decline in oil prices in the fourth quarter of 2018, the price of ERX shares plunged. On dramatic volume, the fund bottomed out in late December, and since then, it has tracked upward with just modest retracements. Those looking to profit from the rising trend should buy on falls below $22, where the price is supported by both the 20-day SMA and a two-month uptrend line. Take-profit orders might be placed by traders at significant resistance levels like $26 and $32. If the price falls far below the trendline, close any open trades since the short-term momentum setup will be invalidated.

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Direxion Daily MSCI Real Estate Bull 3x ETF (DRN)

The Direxion Daily MSCI Real Estate Bull 3x ETF (DRN), which was introduced in 2009, seeks to duplicate the daily performance of the MSCI US REIT Index three times. The $43.66 million AUM fund is ideal for investors who want an aggressive play in equities real estate investment trusts (REITs).Compared to the monitored index, it leans more toward commercial REITs, but it still offers a lot of exposure to residential real estate.

Top holdings in the benchmark include Public Storage (PSA) at 4.04%, Prologis, Inc. (PLD) at 4.70%, and Simon Property Group, Inc. (SPG) at 6.61%. Swing traders, who may let profitable trades run over multiple days to pay somewhat higher trading expenses, shouldn’t be terribly impacted by a 0.63% average spread, since it won’t eat too much into their earnings for scalpers. DRN carries a management fee of 1.09% and, as of February 28, 2019, has a YTD return of 41.86%.

DRN stock rose beyond its August 2018 top earlier this month, but it has now pulled down to provide a swing trading opportunity. A horizontal line connecting the swing highs in July and December should provide strong support for the price of the fund at the present price. Before entering a position, traders may wish to wait for a reversal candlestick pattern, such as a hammer or piercing line, to show that upward momentum has returned. Consider putting a stop loss order beneath the current month’s low and taking gains if the 2016 high at $28.64 is tested.

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