Most Leveraged ETFs for Traders and Investors

If you're looking to amplify your investment returns, leveraged ETFs can be a powerful tool.

These funds use borrowed money to increase their exposure to a particular asset or market, resulting in a potential for higher gains, but also higher risks.

A key consideration for traders and investors is to choose ETFs that align with their investment goals and risk tolerance.

Some of the most leveraged ETFs include those that track the S&P 500, such as the ProShares UltraPro S&P 500 ETF, which uses a 300% leverage.

For those looking to take on more risk, the ProShares UltraPro Short QQQ ETF offers a 300% short leverage, allowing investors to bet against the tech-heavy Nasdaq-100.

Investors should carefully review the underlying holdings and fees associated with these ETFs before making a decision.

Leveraged ETFs are a type of investment that uses derivatives to amplify the exposure to a particular index or asset. They can magnify both gains and losses, making them a high-risk, high-reward option.

Most leveraged ETFs track daily changes, resetting each day, but some may use longer reset periods like one month. This means that if you invest in a leveraged ETF, you could see significant gains or losses in a short period of time.

The leverage in LETFs comes from borrowing and derivatives like forward contracts, futures contracts, total return swaps, and options. These derivatives allow investors to gain exposure to an asset's return without owning it.

Futures contracts, for example, are agreements to buy or sell an asset at a predetermined price at a specific time. Forward contracts are similar, but they are customizable private agreements.

Here are some common derivatives used in LETFs:

Options can add to the gains of LETFs over traditional ETFs, but they also come with upfront fees called premiums.

Leveraged ETFs use financial products and debt to magnify each 1% gain in the underlying index to a 2% or 3% gain.

The extent of the gain depends on the amount of leverage used, which can be a double-edged sword. If the underlying index falls by 1%, the loss is exaggerated by the leverage.

Investors should be aware of the risks of LETFs, as the risk of loss is far higher than that of traditional investments.

Management fees and transaction costs associated with LETFs can diminish the fund's return, with the average expense ratio for LETFs in the US markets at 1.04%, according to ETF.com.

Leveraged ETFs come with significant risks and costs that investors should be aware of. Many LETFs have expense ratios of 1% or more, which is higher than non-leveraged ETFs.

Trading on margin, which is often used with LETFs, can be even more expensive, with fees ranging from 3% or more on the amount borrowed. This can lead to margin calls, where a broker asks for more money to shore up the account if the collateral securities are losing value.

A 2-times leveraged ETF that resets its leverage each day may not always give you twice the index returns if held for more than a day. This is due to volatility drag, which causes actual portfolio growth to trail the arithmetic return.

Here are some key risks and costs associated with LETFs:

Leverage can be a double-edged sword, offering the potential for significant gains but also introducing substantial risks. Volatility drag is a major concern, causing actual portfolio growth to trail the arithmetic return. This means that a 2-times leveraged ETF won't always give you twice the index returns if held for more than a day.

Greater volatility leads to a larger gap between the two, making it difficult to predict the fund's performance. In fact, most leveraged funds' prospectuses write at length about this risk using hypothetical returns. This highlights the importance of understanding the risks involved before investing in a leveraged ETF.

The daily reset mechanism can cause longer-term returns to diverge significantly from simply compounding the underlying index's returns. This can lead to a situation where the ETF is down only 89% over a 10-day period, while the index is down 65%. This is because the compounding effect of the leveraged ETF's daily losses is less significant than the index's overall decline.

Here's a breakdown of the 10-day cumulative change in the example grid:

This highlights the potential for significant losses when using leverage, especially in a rapidly declining market. It's essential to understand the risks and costs involved before investing in a leveraged ETF.

Commodity Volatility Futures can be a wild ride. They're investments that track the price of commodities or volatility, and can be affected by changes in overall market movements, commodity index volatility, or interest rates.

These products may be traded on an exchange, similar to individual stocks. This means their price and value can fluctuate rapidly.

Commodity Volatility Futures may be subject to greater volatility than other types of investments. This is because they often use aggressive investment techniques, such as options, futures, forwards, or other derivatives.

Their unique risk factors include correlation or inverse correlation, market price variance risk, and leverage. This means that even small changes in the market can have a big impact on their value.

Investors should be aware of these risks before investing in Commodity Volatility Futures. They may not be suitable for all investors, especially those who are new to the world of finance.

Most leveraged ETFs use a combination of derivatives and cash to achieve their desired exposure. They can be highly volatile and may not always track their underlying index perfectly.

These funds typically use a technique called "rolling" to manage their derivatives, which involves regularly replacing or "rolling" over expiring contracts with new ones. This can help minimize losses and maximize gains.

The goal of a most leveraged ETF is to provide a return that is a multiple of the return of the underlying index, such as 2x or 3x. For example, if the underlying index rises by 1%, the ETF aims to rise by 2% or 3%.

The market rises 10% daily for 10 days straight. This means the index level increases by 10% each day, resulting in a significant gain.

The index level starts at 100 and increases to 259.37 after 10 days, a total gain of 159.00%. The 2x leveraged long ETF also increases, but at a much faster rate.

Here's a table showing the daily market performance and index level over the 10-day period:

The 2x leveraged long ETF level also increases, with a 10-day cumulative change of 519.00%.

If a market is down 10% daily for 10 days, the expected index level drops to 34.87, a staggering 65% decline from the starting point.

The 2x leveraged long ETF, which aims to double the daily market return, still manages to achieve its daily 2 times return goal, but it suffers significant drag on its long-term performance.

The cumulative change in this scenario is a -65% decline in the index level, with the ETF experiencing a -89% decline in its expected index level.

Here's a breakdown of the daily market performance and expected index levels over the 10-day period:

As you can see, the market's daily 10% decline takes a toll on the index level, and the ETF's performance suffers as a result.

The ProShares UltraPro QQQ (TQQQ) is a 3× daily long exposure to the tech-heavy Nasdaq-100 Index, making it a tool for sophisticated investors.

This ETF provides a way to make significant gains on upward movements in the index over a given day, with a 3% return expected if the Nasdaq-100 increases 1% in a single day.

The daily reset feature means that holding the fund for longer than a single day will result in compounding of returns, which can significantly differ from the target return.

ProShares UltraPro QQQ is a type of 3x leveraged ETF that provides 3 times the daily return of the Nasdaq-100 Index. This index is composed of 100 of the largest non-financial companies listed on the Nasdaq Stock Market based on market capitalization.

The fund is designed for sophisticated investors and is not meant for those with a low risk tolerance or as part of a buy-and-hold investment strategy. Holding the fund for longer than a single day will result in compounding of returns and results that are likely to significantly differ from the target return.

ProShares UltraPro QQQ has an expense ratio of 0.95% and an annual dividend yield of N/A. The fund has a significant amount of assets under management, with over $11.7 billion in assets.

Here are some key statistics about ProShares UltraPro QQQ:

The fund provides bullish investors with a way to make significant gains on upward movements in the index over a given day. If the Nasdaq-100 increases 1% over the course of a single day, then the fund is expected to rise 3%.

Let's take a closer look at ProShares UltraPro Short QQQ (SQQQ), a leveraged ETF that provides a unique way to profit from market declines.

SQQQ offers 3× daily short, or inverse, leverage to the Nasdaq-100 Index, which means if the index falls 1% in a day, the fund is expected to return 3%.

Here are some key facts about SQQQ:

SQQQ's leverage resets daily, which can lead to compounded returns if held beyond a single day. This means investors need to keep track of their holdings frequently to avoid unexpected results.

SQQQ may not be suitable for investors with a low risk tolerance, but it can be a useful tool for sophisticated investors looking to hedge or profit from sharp declines in large-cap tech stocks.

A 3x leveraged ETF attempts to increase an index's returns by 300%. It maintains a specific debt-to-equity ratio within the fund.

These ETFs amplify both gains and losses, making them a high-risk, high-reward investment option. The multiplier works both ways, so you can get multiplied gains during a positive performance and multiplied losses when the index declines.

For example, if an investor bought $10,000 of a 3x leveraged ETF and the underlying financial stocks rose by 1% in a single day, the ETF would provide 3% returns, increasing the investment to $10,300 at the end of the day before fees.

The Direxion Daily Financial Bull 3x Shares (FAS) ETF is a real-world example of a 3x leveraged ETF. It holds equities in large U.S. financial companies and has an expense ratio of 0.94%.

Here are the key characteristics of 3x leveraged ETFs:

A 3x leveraged ETF uses derivatives like swap agreements and securities to achieve its goal. It's essential to understand the risks involved and the potential for significant losses when investing in these types of ETFs.

There are indeed 5x leveraged ETFs available, and they're offered by Leveraged Shares. These funds provide 5 times the daily return of a specific index, such as the S&P 500 or the 20+ Year Treasury Bond.

You can find these 5x ETFs by checking out the Leveraged Shares product lineup. They offer a range of products, including 5x U.S. 500, 5x 20+ Year Treasury Bond, 5x 7-10 Year Treasury Bond, 5x TIPS, and 5x Magnificent 7.

One thing to keep in mind is that these 5x ETFs reset their leverage daily, just like 3x ETFs do. This means that holding them for longer than a day can lead to compounding returns and results that differ from the target return.

Here are some examples of 5x ETFs from Leveraged Shares:

It's worth noting that these 5x ETFs are designed for sophisticated investors who are comfortable with the risks and rewards of leveraged investing. If you're new to ETFs or leveraged investing, it's best to start with more conservative options.

In a rising market, daily compounding of leveraged long ETFs can lead to increasing percentage gains. This is because the value of the index is increasing, and the ETF's gains are driving the value higher at a faster pace.

A double-leveraged ETF, for example, will produce results that equal 2 times the daily performance of the index. This is exactly what happened in a market that rose 10% each day for 10 days in a row, where the ETF's value increased to 120 from 100, while the index rose to 110.

In a trending market, the ETF's gains can result in a return much greater than twice the index return. This is due to the compounding effect of daily gains, which can lead to significant increases in value.

A double-leveraged ETF tracking an index that rose 10% each day for 10 days in a row, started out at 100 and ended at 219.

Leveraged and inverse ETFs aren't for casual investors who plan to hold onto their investments long-term. They're for sophisticated investors who understand the risks and can actively manage their investments daily.

These products require a Most Aggressive investment objective, which means investors need to be prepared for high-risk, high-reward strategies. Investors must also sign a Designated Investments Agreement to purchase these products.

Daily compounding of leveraged investment results can be a major concern for investors, so they need to be aware of this effect.