Index fund investing typically takes a backseat to stock investing for us, but given our reliance on market timing, there are occasionally times where we’ll take a position in a leveraged long index fund. If market-timing indicators are giving the right signals, some of these leveraged ETFs can generate consistently solid 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.
Our Experience with SSO
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 subscribers last May, which is pretty darn good when you’re talking about an index fund.
(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.
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.
Do you own any leveraged long funds in your portfolio? Tell us about them in the comments below.