Key points:
- The LABU stock price has risen 12.65% in the past month.
- The leveraged ETF has outperformed the underlying index.
- However, retail investors should stay from leveraged ETFs.
The Direxion Daily S&P Biotech Bull 3X Shares ETF (NYSEARCA: LABU) stock price has risen 12.65% in the past month amid a broad stock market recovery. LABU’s returns have outpaced those of the underlying S&P Biotechnology Select Industry Index, which it tracks, which is expected.
Investors looking to turbocharge their returns may turn to leveraged ETFs such as LABU, which aims to generate 3X the daily returns of the underlying index. However, as much as leveraged ETFs can triple your returns, they can magnify your losses.
Also read: What Are The Best Performing ETFs In 2022?
For example, investors who bought LABU stock at the beginning of the year are down 78.4%, while investors who bought ETFs tracking the underlying S&P Biotechnology Select Industry Index are down 29.64%.
Investors looking to invest in the biotech sector should target other ETFs such as the SPDR S&P Biotech ETF, the VanEck Biotech ETF and the ProShares Ultra Nasdaq Biotechnology ETF.
As you can see, investing in a leveraged ETF is a double-edged sword that could yield outsized returns and enlarge your losses. However, LABU has risen 12.65% in the past month, while the underlying index is up 5.84%, which shows the advantage of using a leveraged ETF versus a regular ETF.
Still, most investors should not trade leveraged ETFs, given the significant risks associated with them. Instead, only professional and sophisticated investors should trade such ETFs; they should not hold them for long periods.
Leveraged ETFs tend to have high management fees compared to regular ETFs since they have to be adjusted daily; hence, the high fees could erode the gains made by investors. However, these ETFs can be used as short-term hedges against declines in other long-term positions held by investors or fund managers.
Therefore, while the recent gains made by LABU are attractive, retail investors should generally stay away from it unless they use it to hedge other positions. Even then, they should not hold the ETF for long periods.
*This is not investment advice. Always do your due diligence before making investment decisions.
LABU stock price.
The LABU stock price rallied 3.42% to trade at $8.77, rising from Wednesday’s closing price of $8.48.
