March proved to be the wildest month for the U.S. stock market, given the ongoing trade uncertainty under the new administration, which raised concerns about growing inflation and a slowing economy in the United States. Escalation in geopolitical tensions also added to the woes. 

The S&P 500 entered correction (down 10% from its high in February) territory on March 18 for the first time since 2023. With just a few trading days left to end March, the index is down 4.1%. The Nasdaq Composite Index has declined 5%, while the Dow Jones Industrial Average has lost 3.2%. 

The uncertain environment has resulted in increased demand for leveraged and inverse-leveraged ETFs as these fetch outsized returns on quick market turns in a short span. We have highlighted some of the best-performing leveraged or inverse leveraged ETFs that are leading this month. These include MicroSectors Gold Miners 3X Leveraged ETN GDXU, MicroSectors Travel -3x Inverse Leveraged ETN FLYD, Direxion Daily Aerospace & Defense Bull 3X Shares DFEN, Direxion Daily Technology Bear 3x Shares TECS and ProShares UltraPro Short QQQ SQQQ. The funds will remain investors’ darlings, provided sentiments remain similar. 

Leveraged and inverse-leveraged ETFs either create a leveraged long/short position, an inverse long/short position, or a leveraged inverse long/short position in the underlying index through the use of swaps, options, futures contracts or other financial instruments. Due to their compounding effect, investors can enjoy higher returns in a short period, provided the trend remains a friend (see: all the Inverse Equity ETFs here). 

The barrage of recent data, including surveys and sentiment indicators, suggests a downturn in the economy. Per the latest BofA survey, money managers’ optimism faded fast in the early days of Trump 2.0. The survey revealed that the sentiment nosedived in March, resulting in the second-worst plunge in global growth expectations and the biggest drop in U.S. equity allocation since BofA began conducting the survey in 1994.

According to Goldman, hedge funds added more bearish positions than bullish ones in March than at any time since 2020, doubling down on bets that U.S. stocks are likely to fall further. After the first week in March, hedge funds abandoned their stock holdings over 48 hours at the fastest rate in four years.

Though the Fed reaffirmed its forecast for two rate cuts this year, it expects higher inflation and slower economic growth. These combinations have raised heightened volatility and uncertainty in the market.

Amid the pessimism, gold and defense stocks are shining. Strong safe-haven demand has been bolstering gold prices. Gold miners often outperform physical gold during bull markets due to their operating leverage. A small increase in gold prices can significantly boost miners’ profits. Meanwhile, defense companies have been among the best-performing stocks in global markets this year. An unprecedented military spending spree by European leaders has fueled a blistering rally in defense stocks across the board.

MicroSectors Gold Miners 3X Leveraged ETN (GDXU) – Up 28.6%

MicroSectors Gold Miners 3X Leveraged ETN seeks to deliver three times (3X or 300%) the performance of the S-Network MicroSectors Gold Miners Index. It has amassed $466.6 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 624,000 shares (read: 5 Best-Performing Leveraged ETFs of Q1).

MicroSectors Travel -3x Inverse Leveraged ETN (FLYD) – Up 26.8%

MicroSectors Travel -3x Inverse Leveraged ETN offers three times inverse exposure to the performance of the MerQube MicroSectors U.S. Travel Index, which measures the performance of large, liquid U.S. listed and domiciled companies operating in the RBICS Sub Industries related to travel and tourism. It has gathered $1.4 million in its asset base. MicroSectors Travel -3x Inverse Leveraged ETN charges 95 bps in fees per year and trades in an average daily volume of 5,000 shares.

Direxion Daily Aerospace & Defense Bull 3X Shares (DFEN) – Up 19.2%

Direxion Daily Aerospace & Defense Bull 3X Shares creates a three times leveraged long position in the Dow Jones U.S. Select Aerospace & Defense Index. It charges an annual fee of 92 bps and trades in a good average daily volume of about 185,000 shares. Direxion Daily Aerospace & Defense Bull 3X Shares has AUM of $175 million.

Direxion Daily Technology Bear 3x Shares (TECS) – Up 13.9%

Direxion Daily Technology Bear 3x Shares provides three times inverse exposure to the daily performance of the Technology Select Sector Index. It has amassed about $75.8 million in its asset base while charging 91 bps in fees per year from investors. Volume is solid as it exchanges around 853,000 shares a day on average (read: Tariff Relief Boosts Tech ETFs: Is More Upside Ahead?).

ProShares UltraPro Short QQQ (SQQQ) – Up 13.7%

ProShares UltraPro Short QQQ provides three times inverse exposure to the daily performance of the Nasdaq-100 Index, charging 95 bps in annual fees. The index measures the performance of the 100 largest domestic and international non-financial companies listed on Nasdaq based on market capitalization. ProShares UltraPro Short QQQ has AUM of $2.2 billion and trades in an average daily volume of 63 million shares.

Caveat!

These funds run the risk of huge losses compared to traditional funds in fluctuating or seesawing markets. Further, their performance could vary significantly from the actual performance of their underlying index over a longer period when compared to a shorter period (such as weeks or months). 

Investors should note that these products are suitable only for short-term traders as these are rebalanced on a daily basis. Further, liquidity can be a big problem as it can make the products more expensive than they appear.

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ProShares UltraPro Short QQQ (SQQQ): ETF Research Reports

This article originally published on Zacks Investment Research (zacks.com).

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