Since the early 1990s, ETFs have been gaining popularity among all sorts of investors. The simplicity of the transaction executions, a variety of instruments, low expense costs and tax deductions, – all of these made the product highly attractive for the investor. For the medium, to long term investors, it’s a great tool to gain exposure to a great variety of markets and to tailor a well-diversified portfolio. What about short-term trading? Can we trade ETFs aiming for the holding period of several days to weeks, or even catch a momentum within a single trading session? The answer is – it depends. The main requirement for short-term trading is enough liquidity and volatility. Only a handful of ETFs is liquid enough for the active day trading, such as Spyder (SPY). 

How do you trade short-term with ETFs?

ETFs are diversified products, so a simple chart analysis works well for making short-term trading decisions. It would be a good idea to work solely with daily and weekly charts trading ETFs short-term. If you’re concerned, it’s too slow and there won’t be enough trading signals, no worries, the advantage of ETFs is that they cover a broad spectrum of markets.

Leveraged ETFs

If you’re lacking volatility trading traditional ETFs, you might want to look into Leveraged Exchange Traded Funds. This kind of ETFs amplifies the price changes of the underlying index. If the underlying of a leveraged ETF is S&P500, and the index gains 1%, the leveraged ETF would gain 2% to 3%. The amount of the gain depends on the type of leveraged ETF you use. There are 2X and 3X leveraged ETFs. That means they magnify the fluctuations of the underlying index by 200% and 300%. The increase of the leveraged ETFs’ fluctuations is attained by the usage of derivatives such as options, swaps etc. Leveraged ETFs carry higher transaction costs compared to classic ETFs, as derivatives require transactions fees. For instance, if you buy call options, you need to pay a premium.  

Leveraged ETFs offer significant opportunities and associated risks for day trading. Traders can exploit the market moves more by the magnifying effect of the leveraged ETFs. As this kind of high-risk instruments gets more popular, their average trading volume is enough to mitigate the lack of liquidity that pertains to some traditional ETF products. For example, for the last three months, Direxion Daily Gold Miners Index Bull 2X Shares (NUGT) has had the average trading volume of 5.66 million shares per day, that’s roughly the liquidity equivalent of some of the top 10 gold mining companies traded on NYSE.

Major 3X ETFs

Let’s look closer at the most popular and volatile 3X ETFs.

Direxion Daily S&P500 Bull 3X Shares (NYSE: SPXL) – seeks the 300% of daily change of the S&P500 Index. The instrument is suitable for short-term trading with the emphasis on US large-cap stocks. The advantage of the instrument is its liquidity. As SPXL has the weekly volatility of over 5%, the instrument stands out with the average daily trading volume of 22.64 million shares. In comparison, SPXL would be not far from the top 10 traded S&P500 stocks with similar properties (see the list below).

No.CompanyTickerAverage volume (3 month)Volatility (Week)ATR
Direxion Daily S&P500 Bull 3X SharesSPXL22.64M5.22%2.47
1American Airlines Group Inc. AAL99.84M9.55%1.61
2Carnival Corporation & PlcCCL68.54M8.93%1.82
3Norwegian Cruise Line Holdings Ltd. NCLH62.54M10.41%2.12
4United Airlines Holdings, Inc. AAL61.26M9.04%3.75
5Delta Air Lines, Inc.DAL60.97M6.40%2.23
6Occidental Petroleum CorporationOXY47.05M5.96%1.56
7The Boeing CompanyBA46.09M5.70%13.4
8Marathon Oil CorporationMRO43.98M5.39%0.44
9MGM Resorts InternationalMGM29.32M6.82%1.35
10Facebook, Inc.FB25.76M5.43%8.43

ProShares UltraPro QQQ (NYSE: TQQQ) – offers 3x leverage tracking NASDAQ-100 Index. Being one of the most liquid leveraged ETFs, TQQQ is ideal for catching momentum in the sectors of non-financial companies. Sector rotation is one of the most frequent index movers. A strong bullish trend in the NASDAQ-100 Index, attracts many investors to try to take advantage of the move. TQQQ enables a short-term trader to participate in the daily momentum while not using up a big amount of capital, like in case of holding individual stocks.

Direxion Daily Gold Miners Bull 2X Shares (NYSE: NUGT) – if you’re a short-term gold trader, this is your instrument. The ETF offers 2x daily leverage. Only five gold miners’ stocks traded on NYSE have similar weekly volatility and the average volume as NUGT. As you never know what’s going on in the individual companies, it’s better to diversify the exposure. Out of 39 gold miners that are traded on NYSE/NASDAQ, only five have similar average volume and volatility with NUGT. If you want to bet on the gold miners in the short term, NUGT offers high volatility, liquidity and even diversification solutions. 

Diversify while day trading

Let’s see an example of how trading NUGT can protect you from the uncertainty related to individual stocks. Here is the intraday chart of Hecla Mining Company (see the chart below) on the day of the earnings report on May 7 2020. During the entire trading session, the stock has been in the negative territory, but NUGT (the red chart) stayed positive. Even the frantic selloff at the opening that made the stock sink to -10% didn’t manage to pull NUGT below zero % of daily change. 

Diversify while day tradingDirexion Daily Small Cap Bull 3X Shares (NYSE: TNA) Tracks Russell 2000 Index and offers 3x daily leverage. Russell 2000 Index is a small-cap stocks Index. TNA offers exposure to the small-caps for short-term investors. The instrument would be suitable for the short-term traders seeking exposure of equities and the maximum volatility. Currently, the weekly volatility of TNA surpasses SPXL by 2%.

Direxion Daily 20-Year Treasury Bull 3X (NYSE: TMF) – Tracks NYSE 20 Year Plus Treasury Bond Index and offers 3x leverage. In order to trade TMF, a trader should understand the fundamentals and market sentiments related to the US economy. During the economic instability and the risk of the stock market crash, you can expect significant bullish opportunities in TMF. Volatility is usually caused by long-term investors flocking to bonds as safe-havens for their assets.

Direxion Daily Financial Bull 3X Shares (NYSE: FAS) – Tracks Russell 1000 Financial Services Index and offers 3x daily leverage. The index measures the performance of large-caps from the financial sector. The financial sector is highly sensitive to the interest rates’ changes and gives early signals about the market’s direction. FAS gives an opportunity to exploit early signs of the market changing sentiments.

Direxion Daily S&P Biotech Bull 3x Shares (NYSE: LABU) – Tracks S&P Biotechnology Select Industry Index and also exposed to SPDR S&P Biotech ETF. The biotech sector is driven by catalysts. The catalysts can be FDA approvals, Phase 1,2 and 3 data releases, regulations change etc. Often, one particular company could trigger the whole sector to move. It’s hard to predict which stock would be the next move’s catalyst. If there is a move, short-term traders will spot it monitoring LABU. If you manage to catch the momentum, you can profit more compared to holding a basket of biotech stocks as the ETF magnifies the price change three-fold. 

Direxion Robotics Artificial Intelligence & Automation Index Bull 3X Shares (NYSE: UBOT) – Tracks Indxx Global Robotics and Artificial Intelligence Thematic Index. The ETF magnifies the price change of the underlying index three times as it’s leveraged. The underlying index provides an exposure to the companies in the developed countries focused on automation, artificial intelligence and utilization of robots for all purposes. As the product was introduced in April 2018, it’s not too volatile compared to other leveraged ETFs, and the average daily volume is still very low, – only 22.3K shares. Today more tech-companies focus on using AI. We can expect more liquidity and momentum trading opportunities in UBOT in the upcoming years.

The Bottom Line

Leveraged ETFs are the great tools to catch the momentum in various sectors intraday. Described earlier ETFs are primarily intended for holding daily buy positions. If a trader wants to execute a short-sell trade, it’s better to use inverse leveraged ETFs due to the lower fees. As these products are leveraged, they are not appropriate for long-term investment due to the high expense costs and the volatile nature. Traders must always be aware that the risks are magnified along with the potential gains. In case the trader is wrong, significant losses may occur. It’s crucial to use stop orders to limit the risks. Trade leveraged ETFs only if you possess a high-risk tolerance.