Leveraged ETF List Explained

Leveraged ETFs are designed to provide a multiple of the daily return of the underlying index, but they can be complex and come with risks.

These ETFs use derivatives, such as futures and options, to amplify their returns, which can be beneficial for traders who want to magnify their gains.

However, the leverage can also work against you, resulting in significant losses if the market moves against your position.

In the US, the most popular leveraged ETFs are listed on the NYSE Arca exchange, and they track a wide range of indices, from the S&P 500 to international markets.

ProShares UltraPro S&P500 (UPRO) is a daily leveraged ETF that delivers 3x the daily performance of the S&P 500.

It achieves this by holding 77% individual S&P 500 stocks, and 8% S&P futures.

The remaining 215% of the S&P 500's daily performance is obtained through total return swaps with major investment banks.

The borrowing rate for some of UPRO's swap agreements was 3.01% as of May 2019.

For more insights, see: 2x Leveraged S&p 500 Etf

One of the main issues with leveraged ETFs is their potential for significant losses due to compounding, which can result in returns that are significantly different from the expected 2x or 3x return.

The use of derivatives, such as futures and options, can amplify losses as well as gains, making it difficult for investors to predict the actual performance of the ETF.

Leveraged ETFs can also be sensitive to market volatility, with even small changes in the underlying index leading to large losses in the ETF.

The ProShares UltraPro QQQ ETF, for example, has a 3x daily return, but its actual return over a period of time can be significantly different from 3x the return of the underlying Nasdaq-100 Index.

In addition, leveraged ETFs can be subject to a phenomenon called "decay", where the ETF's return begins to diverge from the expected return over time.

Leveraged ETFs are designed to deliver multiples of the performance of the index or benchmark they track. They're not for long-term investing.

In contrast, inverse ETFs seek to deliver the opposite of the performance of the index or benchmark they track. This can be a useful tool for traders looking to profit from a market decline.

Leveraged inverse ETFs, also known as "ultra short" funds, seek to achieve a return that is a multiple of the inverse performance of the underlying index. This means they can potentially deliver triple the inverse performance of the index.

Here are some examples of popular leveraged ETFs:

It's essential to note that leveraged ETFs are not suitable for long-term investors. They're designed for short-term trading and come with significant risks. Always read the fund company's factsheets and prospectus to understand the issues involved.

For another approach, see: Long Term Equity Anticipation Security

Daily Leveraged ETFs are designed to deliver multiples of the performance of the index or benchmark they track. They hold a combination of derivatives and actual securities to achieve this goal.

For example, ProShares UltraPro S&P500 (UPRO) holds 77% individual S&P 500 stocks, which is a significant portion of its overall exposure. This is because the fund aims to deliver 3x the daily performance of the S&P 500.

A fresh viewpoint: Triple Leveraged S&p 500 Etf

Total return swaps are a key component of daily leveraged ETFs, allowing them to achieve their desired multiples. These contracts between the ETF and major investment banks involve paying and receiving daily returns, with a pre-negotiated interest rate, which is typically close to the short-term treasury rate.

ProShares UltraPro S&P500's (UPRO) borrowing rate for some of its swap agreements was 3.01% as of May 2019. This cost is not included in the fund's 0.92% expense ratio.

Leveraged ETFs like ProShares Ultra S&P500 (SSO) and Direxion Emerging Markets Bear 3X ETF (EDZ) have specific goals, such as delivering 2x or 300% of the inverse performance of the underlying index.

See what others are reading: Proshares Nasdaq Etf

Daily leveraged ETFs hold a combination of derivatives and actual securities to track a multiple of the underlying index's daily performance.

These funds use a mix of individual stocks, total return swaps, and futures contracts to achieve their desired level of leverage.

ProShares UltraPro S&P500 (UPRO) is an example of a daily leveraged ETF that promises to deliver 3x the daily performance of the S&P 500.

It achieves this by holding 77% individual S&P 500 stocks, 8% S&P futures, and nominal exposure to 215% of the S&P 500 through total return swaps.

Total return swaps are contracts between the ETF and major investment banks, where the banks pay the ETF the value of the S&P 500's total return for that day, and the ETF pays the banks a pre-negotiated rate of interest.

The borrowing rate of some UPRO's swap agreements was 3.01% as of May 2019, which is not included in UPRO's 0.92% expense ratio.

Leveraged ETFs can be a bit tricky to understand, but it's essential to know the key differences before investing.

The most significant difference is that leveraged ETFs don't always deliver the promised returns. For example, the ProShares Ultra S&P 500 ETF earned less than the Vanguard 500 Index fund since its inception in 2007.

You might expect a 2X ETF to earn twice the return of the index, but in reality, it's often less. In the case of the ProShares Ultra S&P 500 ETF, it earned $6,097, which is less than the Vanguard 500 Index fund earnings of $6,966.

This means that investing in a 2X ETF might not be as profitable as you think.

See what others are reading: 2x Leveraged Etf

Leveraged ETFs can be a double-edged sword, offering amplified returns but also magnifying losses.

Their performance is closely tied to the underlying index, which can be volatile and unpredictable.

Leveraged ETFs aim to provide a multiple of the daily return of the underlying index, but this can lead to significant deviations over time.

In fact, a study of 3x ETFs found that over 60% of them underperformed their benchmark over a 1-year period.

The ProShares UltraPro QQQ ETF, for example, has a 3x daily return of the Nasdaq-100 Index, but its 1-year performance was -35.6%, significantly underperforming the index.

The ProShares UltraPro Short QQQ ETF, on the other hand, aims to deliver the opposite of the Nasdaq-100 Index, but its 1-year performance was 28.1%, far exceeding the index's return.

The Direxion Daily Small Cap Bull 3X Shares ETF has a 3x daily return of the Russell 2000 Index, but its 1-year performance was -34.6%, significantly underperforming the index.

If you're looking for specific ETFs to consider, here are a few options that have been discussed in our previous sections.

Direxion Daily S&P 500 Bull 3X Shares (SPXL) offers a 3x daily return, making it a popular choice for traders looking to amplify their gains.

The ProShares UltraPro Short QQQ (SQQQ) is a bearish ETF that seeks to deliver a 3x daily return that is the inverse of the NASDAQ-100 Index.

The Direxion Daily Small Cap Bull 3X Shares (TNA) is designed to provide a 3x daily return that is tied to the performance of the Russell 2000 Index.

If this caught your attention, see: Direxion Leveraged Etf

The ProShares UltraPro Short Nasdaq-100 (SQQQ) is another bearish ETF that seeks to deliver a 3x daily return that is the inverse of the NASDAQ-100 Index.

The ProShares UltraPro QQQ (TQQQ) is a bullish ETF that offers a 3x daily return that is tied to the performance of the NASDAQ-100 Index.

On a similar theme: Proshares Etf List