Five Leveraged ETFs Delivering Big Gains

by on January 31, 2012 | ETFs Mentioned:

Despite some rather significant bumps along the road in 2011, many asset classes are now well into positive territory on a one year trailing basis as January draws to a close, riding high thanks to a strong finish to last year and start to 2012. Included on that list are a number of leveraged ETFs that seek to amplify exposure to various asset classes, highlighting the potential to use these products to capture attractive returns over extended periods of time [see also Leveraged ETFs FAQs].

That might come as a bit of a surprise to some investors, as there remains a bit of a misconception over the performance attributes of leveraged ETPs that are held for multiple months. While there exists the potential for “return erosion” related to the resets of exposure in volatile markets, it is certainly possible for leveraged products to deliver big returns when held throughout any type of market.¬†

Below are profiles of seven leveraged ETPs that have posted big gains over the last year or so, dispelling the myth that holding these securities over an extended period of time is investing suicide [sign up for the free ETFdb newsletter]:

1. PowerShares DB 3x Long 25+ Year Treasury Bond ETN (LBND)

Ticker 52-Week Return*
LBND 118.1%
UGL 61.9%
BIB 35.6%
TYD 44.8%
MLPL 30.8%
*As of 1/30/2012

LBND has more than doubled over the last year as long term bonds have defied expectations for a crash and actually thrived thanks to strong demand from yield hungry investors. LBND is an exchange-traded note (ETN) linked to an index comprised of futures contracts on long-dated Treasuries. As such, it’s important to note that this ETN doesn’t regularly make distributions, even if the underlying bonds have a fairly attractive yield (at least in the current environment).

LBND, which charges an annual fee of 0.95%, is up about 120% over the last year.

2. ProShares Ultra Gold (UGL)

This ETF seeks to deliver daily results that correspond to 200% of the daily change in gold bullion prices, making UGL a popular tool for investors bullish on the short term outlook for the precious metal. Gold has been climbing steadily higher over the last year, and UGL has delivered some impressive results as a result of the rally. Bolstered by a hot start to 2012–UGL is up about 20% in January–this ETF has added about 60% over the last year. By comparison, the physically-backed GLD is up only about 32% over that period–meaning that UGL has approximated its target daily leverage over a much longer period of time [see our GLD-Free Gold Bug ETFdb Portfolio].

The PowerShares DB Gold Double Long ETN (DGP), which resets exposure on a monthly basis, is similarly up about 60% over the last year.

3. Ultra Nasdaq Biotechnology (BIB)

This ETF offers 2x daily leveraged exposure to the NASDAQ Biotechnology Index, a benchmark that includes about 120 different pharmaceutical and biotech companies. Biotech has quietly been enjoying an impressive run higher, and BIB has thrived as M&A activity and a general increase in appetite for risky securities has boosted prices. BIB, which often sees single session swings of 2% or more, is up an impressive 35% over the last year.

The iShares Basdaq Biotechnology Index Fund (IBB), which offers beta exposure to the same underlying index, has added about 20% over the same time period.

4. Daily 7-10 Year Treasury Bull 3x Shares (TYD)

Intermediate term Treasuries may not be the sexiest asset class out there, but this Direxion ETF has delivered some impressive returns recently. TYD, which seeks to deliver 3x daily exposure to an index comprised of Treasuries maturing in the next seven to ten years, has seen its price jump as investors have sought to extend the duration of their fixed income portfolios. Over the last year, TYD has gained an impressive 45% [see Early ETF Stars Of 2012].

5. ETRACS 2x Leveraged Long Alerian MLP Infrastructure Index ETN (MLPL)

This monthly leveraged ETN from UBS has caught the eye of investors interested in current yield; unlike the aforementioned LBND, MLPL makes regular distributions that are amplified by the leverage used in this product. MLPL offers 2x leverage, on a monthly basis, to an index comprised of MLPs [see Tax Differences Between MLP ETNs and ETFs Explained].

Leveraged ETFs are, of course, very risky assets; the list of the worst performers over the last 12 months includes a number of steep losses by leveraged ETPs. If used to amplify a losing bet, the performance figures can become abysmal in a short period of time–and downright depressing if those trends continue to play out over an extended stretch.

Disclosure: No positions at time of writing.