How to Trade 2019’s Best Performing Leveraged Sector ETFs

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How to Trade 2019’s Best Performing Leveraged Sector ETFs

Stocks have exploded out of the gate this year, recouping the lion’s share of last year’s severe third-quarter losses. Specifically, cyclical sectors like as technology, energy, and real estate have experienced significant inflows as investors welcome a more dovish Federal Reserve, continuing trade talks between the United States and China, and a wave of quarterly profits that surpassed Wall Street’s expectations. Furthermore, the likelihood of the economy entering a recession seems to have decreased.

“Because the markets have weakened and Fed policymakers now realize that the economy and inflation are weak,” stated Ray Dalio, founder of Bridgewater Associates, a Connecticut-based hedge fund. “I have reduced my probability of a US recession occurring before to the US presidential election to roughly 35%,” he wrote in a LinkedIn letter.

Those looking to profit from the best performing industries in 2019 might consider utilizing leveraged exchange-traded funds (ETFs), which are particularly intended to amplify short-term price changes. For example, if an index of technology equities gains 1%, a tracking leveraged ETF with three times exposure gains 3%. Traders should be mindful that leveraged ETFs reset daily, thus returns over a multi-day holding period may not represent the fund’s claimed leverage owing to compounding effects. Consider a few trading strategies with leveraged sector ETFs.

Direxion Daily Technology Bull 3X ETF (TECL)

The Direxion Daily Technology Bull 3X ETF (TECL), launched in 2008, promises to give three times the daily return of the Technology Select Sector Index. The benchmark index includes large-cap technology companies such as Apple Inc. (AAPL), Microsoft Corporation (MSFT), and Alphabet Inc., the parent company of Google (GOOGL).The fund’s 0.08% average spread and daily turnover of over 400,000 shares make it an ideal tool for all types of short-term trading. TECL is up 45.76% year to date (YTD) as of Feb. 28, 2019, with $550.57 million in assets under management (AUM) and a dividend yield of 0.39%. The ETF carries a 1.17% management fee, which has no effect on short-term stays.

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After hitting a low of $68.96 in late December, TECL’s stock has risen about 80% to end at $123.56 on Feb. 27. Traders who wish to profit from this market’s strong trend can search for entry possibilities on pullbacks to the 20-day simple moving average (SMA).If the fund’s price rises further, the SMA may be utilized as a trailing stop to allow profits to run. Those who have open positions might consider adjusting the stop to the breakeven mark as the price approaches $130, a region where the 200-day SMA may provide support.

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Direxion Daily Energy Bull 3X ETF (ERX)

The Direxion Daily Energy Bull 3X ETF (ERX), which has net assets in excess of $400 million, seeks to outperform the Energy Select Sector Index on a daily basis. Exxon Mobil Corporation (XOM) and Chevron Corporation (CVX) dominate the underlying index, accounting for 41.75% of its total weighted. Tight spreads and high liquidity make this ETF a favorite among energy traders. The fund provides a yield of 2.29% and an expense ratio of little more than 1%. ERX has returned 46.27% as of February 28, 2019.

Following a steep drop in oil prices, the ERX share price plummeted off a cliff in the fourth quarter of 2018. The fund bottomed on climactic volume in late December and has subsequently headed upward with just small retracements. Those looking to ride the upswing should enter on dips to $22, where the price finds support from a two-month uptrend line and the 20-day SMA. Take-profit orders might be placed at important resistance levels such as $26 and $32. If the price falls far below the trendline, the short-term momentum setup is rendered useless.

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

The Direxion Daily MSCI Real Estate Bull 3x ETF (DRN), which debuted in 2009, seeks to mimic three times the daily performance of the MSCI US REIT Index. The fund, which has an AUM of $43.66 million, is suitable for traders looking for an aggressive play in equities real estate investment trusts (REITs).It is more oriented toward commercial REITs than the monitored index, although it still has a significant exposure to residential real estate.

The benchmark’s top allocations are 6.61% for Simon Property Group, Inc. (SPG), 4.70% for Prologis, Inc. (PLD), and 4.04% for Public Storage (PSA). A 0.63% average spread may cut into scalpers’ gains too much, but it should not have a significant impact for swing traders, who may let profitable deals continue for many days to pay somewhat increased trading expenses. DRN carries a 1.09% management fee and has returned 41.86% YTD as of February 28, 2019.

DRN shares rose beyond their August 2018 peak earlier this month, but have now retreated from those highs, presenting a swing trading opportunity. A horizontal line connecting the July and December swing highs should provide robust support for the fund’s price at the present level. Before entering a position, traders should look for a reversal candlestick pattern, such as a hammer or piercing line, to indicate that upward momentum has returned. Consider putting a stop-loss order below this month’s low and profiting on a test of the 2016 high at $28.64.

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