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3 Small- and Mid-Cap Leveraged Long Funds Worth Watching

We’re usually stock pickers, but there are times when investing in leveraged long funds makes sense. Right now, these three look appealing.

Exchange Traded Fund

Stacks of coins with the letters ETF isolated on white background

Stacks of coins with the letters ETF isolated on white background

We’re usually stock pickers, but there are times when investing in leveraged long funds makes sense. Right now, these three look appealing.

We’re always focused first and foremost on finding new leading stocks, but market timing is a big part of what we do, and that’s why at certain times we’ve owned a stake in a leveraged long index fund. When the right set of circumstances comes along, owning the right ETF can provide solid and relatively smooth returns.

One of our favorite times to jump into leveraged long funds is when we see some of our time-tested blastoff indicators flash green. These blastoff indicators speak up when they spot overwhelming strength in the market—basically when the situation becomes “hyper-overbought.” Most investors think such an environment is bearish (things have come “too far too fast”) but history tells us just the opposite, that these periods actually lead to huge returns over time with little drawdown.


The SSO Example

That’s exactly what we did over a year ago with ProShares Ultra S&P 500 Fund (SSO). In late May, both our 90% and 2-to-1 Blastoff Indicators flashed as the market accelerated higher after the March 2020 crash. The news was awful and to many the market looked too high, but we dove in and SSO did well for a few months.

What’s interesting (and somewhat lucky) was that another blastoff measure turned positive just after last year’s election—the Three Day Thrust (three straight days of at least 1.5% gains in the S&P 500) rule kicked in, which itself has a sterling track record. Sure enough, SSO has more than doubled from since we first recommended it to our Cabot Growth Investor subscribers last May, which is pretty darn good when you’re talking about an index fund.

The SSO is a leveraged long fund that did quite well for us last year.

(As a heads up, when we do play leveraged long funds, we restrict ourselves to (a) a major index, not a sector, (b) no more than double leverage, moving twice the index on a daily basis, and (c) something that’s well traded, so we all have the ability to get in or out if need be. If you want to be more aggressive and play triple-leveraged sector funds, that’s fine, but it’s not for us—we’re trying to play out intermediate- to longer-term moves, not trade in and out, so we want something with a bit more stability.)

Back to today, we don’t have anything that high-odds on the horizon; if anything, the broad market has been weakening of late as the overall environment remains tricky and challenging. But what’s interesting is that many of those broad market indexes—particularly small caps and mid-caps—are setting up beautifully in the big picture.

3 Leveraged Long Funds to Consider

Take a look at the iShares Russell 2000 Fund (IWM), which is the most popular small-cap index out there. Shown here is a nearly four-year chart of the fund, and you can see that from mid-2018 through October of last year, about 27 months of action, the small-cap sector of the market built a huge base.


Then came the November blastoff (mentioned above) that kicked off a giant run in the broad market—the IWM broke out and ran up beautifully into February. And now that fund has gone straight sideways for more than five months. It’s a similar story with the SPDR S&P Mid-cap 400 Fund (MDY); if anything, mid-caps have been a touch stronger than small caps of late.

The MDY is a leveraged long fund that looks intriguing right now.

Either way, when you step back, both broad market areas are etching their first consolidation in several years, which in and of itself usually leads to good things. The fact that the “corrections” thus far have been very tame given the post-November advance also bodes well. When looking for leveraged long funds, there’s nothing too appealing for the S&P 400; most funds are pretty thin. But for small caps, we’re keeping an eye on the ProShares Ultra Russell 2000 Fund (UWM), which is the same as SSO but tracks the Russell 2000 instead of the S&P 500.

We’re not going to anticipate anything, as for all we know small caps will pull back further in the weeks or months ahead. But the setup is nice, both in the short and long term; a powerful breakout going forward could provide an opportunity for something like UWM.

In the meantime, if you want to know what growth stocks and leveraged long funds we’re currently recommending, you can subscribe to our Cabot Growth Investor advisory by clicking here.

Do you own any leveraged long funds in your portfolio? Tell us about them in the comments below.

*Editor’s Note: This post was excerpted from the latest issue of Cabot Growth Investor.


A growth stock and market timing expert, Michael Cintolo is Chief Investment Strategist of Cabot Wealth Network and Chief Analyst of Cabot Growth Investor and Cabot Top Ten Trader. Since joining Cabot in 1999, Mike has uncovered exceptional growth stocks and helped to create new tools and rules for buying and selling stocks. Perhaps most notable was his development of the proprietary trend-following market timing system, Cabot Tides, which has helped Cabot place among the top handful of market-timing newsletters numerous times.