How to Trade 2019's Best Performing Leveraged Sector ETFs

Stocks have jumped out of the gate in the first two months of the year, clawing back the lion's share of last year's steep third quarter losses. In particular, cyclical sectors such as technology, energy and real estate have seen substantial inflows as investors cheer a more dovish Federal Reserve, ongoing trade negotiations between the U.S. and China, and a round of quarterly earnings that have exceeded Wall Street's expectations. Also, the chances of the economy slipping into recession look to have reduced.

"Because the markets weakened and Fed officials now see that the economy and inflation are weak, there has been a shift to an easier stance," wrote Ray Dalio, founder of Bridgewater Associates, a Connecticut-based hedge fund. "I have lowered my odds of a U.S. recession coming prior to the U.S. presidential election to about 35%," he continued, per a note on LinkedIn.

Those who want to take advantage of 2019's top performing sectors should consider using leveraged exchange-traded funds (ETFs) that are specifically designed to magnify short-term price movements. For example, if an index comprising technology stocks is up 1%, a tracking leveraged ETF providing three times exposure would be up 3%. Traders should be aware that leveraged ETFs reset daily – therefore, returns over a holding period of more than one day may not reflect the fund's advertised leverage due to compounding effects. Let's consider several trading ideas relating to leveraged sector ETFs.

Direxion Daily Technology Bull 3X ETF (TECL)

Created in 2008, the Direxion Daily Technology Bull 3X ETF (TECL) seeks to provide three times the daily return of the Technology Select Sector Index. The benchmark index consists of U.S. large-cap technology names such as Apple Inc. (AAPL), Microsoft Corporation (MSFT) and Google parent company Alphabet Inc. (GOOGL). The fund's tight 0.08% average spread and daily turnover of more than 400,000 shares make it a suitable instrument for all forms of short-term trading. TECL, with assets under management (AUM) of $550.57 million and offering a 0.39% dividend yield, is up 45.76% year to date (YTD) as of Feb. 28, 2019. The ETF charges a 1.17% management fee, which has a minimal impact on short stays.

After bottoming out at $68.96 in late December, TECL's share price has rallied almost 80% to close at $123.56 on Feb. 27. Traders who want to capitalize on this strongly trending market should look for entry points on pullbacks to the 20-day simple moving average (SMA). If the fund's price continues higher, the SMA can then be used as a trailing stop to let profits run. Those who hold open positions should consider moving the stop to the breakeven point when the price nears $130 – an area where it may find resistance from the 200-day SMA.

Direxion Daily Energy Bull 3X ETF (ERX)

The Direxion Daily Energy Bull 3X ETF (ERX), with net assets that exceed $400 million, aims to return three times the daily investment results of the Energy Select Sector Index. Energy sector heavyweights Exxon Mobil Corporation (XOM) and Chevron Corporation (CVX) dominate the underlying index, carrying a cumulative weighting of 41.75%. Tight spreads and deep liquidity make this ETF an energy trader's favorite. The fund yields 2.29% and has an expense ratio of just over 1%. As of Feb. 28, 2019, ERX has returned 46.27%.

The ERX share price fell off a cliff in the fourth quarter of 2018, following oil prices sharply lower. The fund bottomed in late December on climactic volume and has since tracked higher with only minor retracements. Those who wish to ride the upward momentum should enter on dips to $22, where the price finds a confluence of support from a two-month uptrend line and 20-day SMA. Traders could set take-profit orders at key resistance levels such as $26 and $32. Close open positions if the price falls much below the trendline, as this invalidates the short-term momentum setup.

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

Launched in 2009, the Direxion Daily MSCI Real Estate Bull 3x ETF (DRN) attempts to replicate three times the daily performance of MSCI US REIT Index. The fund, with AUM of $43.66 million, suits traders who want an aggressive play in equity real estate investment trusts (REITs). It tilts more toward commercial REITs than the tracked index but still provides ample exposure to residential real estate.

Top allocations in the benchmark include Simon Property Group, Inc. (SPG) at 6.61%, Prologis, Inc. (PLD) at 4.70% and Public Storage (PSA) at 4.04%. A 0.63% average spread may eat too much into profits for scalpers but shouldn't overly affect swing traders who can let winning trades run over several days to cover slightly higher trading costs. DRN charges a management fee of 1.09% and has returned 41.86% YTD as of Feb. 28, 2019.

DRN shares rallied above their August 2018 peak earlier this month but have recently backed away from those highs to provide a swing trading opportunity. The fund's price should find solid support at the current price from a horizontal line that connects the July and December swing highs. Traders may want to wait for a reversal candlestick pattern, such as hammer or piercing line, to confirm that upward momentum has resumed before opening a position. Think about placing a stop-loss order under this month's low and booking profits on a test of the 2016 high at $28.64.