• Free Book
  • Store
    • Books
    • Free First Chapters
    • Free Newsletters
  • Recent Articles

TradingMarkets.com

Quantified Stock Market Trading Strategies & Systems

  • Home
  • New Trading Research
  • Education
    • Articles
      • Connors Research
      • ETFs
      • Options
      • Stocks
      • Volatility
    • Trading Lessons
    • Connors Research
    • Glossary
    • Interview Archive
    • Videos
  • Python
  • Quantamentals
    • Quantamentals: The Next Great Forefront of Trading and Investing
    • Quantamentals Resources
  • Courses
  • Store
    • New Book! The Alpha Formula
    • “Buy The Fear, Sell The Greed” – Best Seller!
    • Swing Trading College 2019
    • Trading Books and Guidebooks
    • Street Smarts
    • Online Trading Courses
    • Private Mentoring with Larry Connors
    • Customized Trading Research
    • Amibroker Strategy Add On Modules
You are here: Home / ETFs / Commentary / What You Need to Know About Trading and Investing in Leveraged ETFs

What You Need to Know About Trading and Investing in Leveraged ETFs

August 15, 2009 by David Penn

Depending on whom you ask, leveraged exchange-traded funds (ETFs) like those offered by ProShares, Rydex, Direxion and others are either the greatest thing since sliced bread or the worst thing to happen to the stock market since the publication of Dow 36,000.

But before you know whether leveraged ETFs are for you, it’s a good idea to know just what leveraged ETFs are – and are not. That will make it easier for you to review your own ETF trading and investing strategy to see how leveraged ETFs may be a good fit for you.

Getting to Know Leveraged ETFs

Leveraged ETFs are exchange-traded funds that are built to return 200% or even 300% of the daily return of their underlying benchmark. That benchmark is typically an index representing a market like the Russell 2000 or the S&P 500 or a sector like the Financial, Energy or Technology sectors. 2x or Double Leveraged ETFs seek to return 200%, while 3x or Triple Leveraged ETFs are designed to return 300%.

^UWM^

UWM Chart

How do they do this? Leveraged ETFs include among their holdings derivative instruments that help the funds achieve their daily 2x or 3x returns. These derivatives may be swaps, options, futures or other instruments based on the underlying benchmark, and are responsible for what makes leveraged ETFs have their extra get up and go.

But what is most important to remember about leveraged ETFs is this: while there are some ETF families that are considering developing leveraged ETFs that are built to track monthly returns, the vast majority of leveraged ETFs are built based on daily returns.

What does this mean to you as an ETF trader or ETF investor? It means that over the short term, an S&P 500 ETF that is leveraged 2-to-1 to the S&P 500, for example, will produce a return that is very much close to 200%. But in the intermediate and long term, the returns from this same leveraged ETF will be less than 200%. This is in large part because while the daily difference in return between the leveraged ETF and the underlying benchmark is relatively minor, that same difference over the period of a year – or several years in the case of those using leveraged ETFs for long term investment purposes – amounts to a sizable performance shortfall.

What Should You Do with Leveraged ETFs?

^SSO^

SSO Chart

In addition to their role in hedging investments in stocks, leveraged ETFs are ideal vehicles for short term trading. In the short term ETF trading, all of the issues mentioned above that appear with long term investing in leveraged ETFs vanish. With holding periods of no more than 5 to 8 days at the maximum, short trading strategies that use leveraged ETFs are a way to take advantage of the best features of these new products, while avoiding the temptation of trying to make leveraged ETFs do something they are not designed to do (at least not yet).

Much of the confusion about leveraged ETFs has to do with too many people trying to treat them the same way they do ordinary, non-leveraged ETFs. Ordinary, non-leveraged ETFs can be a fine option for long term investors looking for lower costs in ETF investing compared to mutual fund investing.

But not all ETFs are created equally. And knowing what your ETF is designed to do – and how it does it – is vital in making ETFs a winning part of your trading and investing strategy.

Do you trade SSO? Click here to see if SSO will likely increase or decrease in price over the next few trading days with up to 79% accuracy.

David Penn is Editor in Chief at TradingMarkets.com.

Filed Under: Commentary, Recent Tagged With: ETF Trading, investing strategies, leveraged ETFs, leveraged ETFs Trading, trading ETFs

Buy The Fear, Sell The Greed

Buy The Fear, Sell The Greed

Swing Trading College

New Book From Larry Connors and Chris Cain, CMT – "The Alpha Formula; High Powered Strategies to Beat The Market With Less Risk"

We’re excited to announce the release of a new investment book written by Larry Connors and Chris Cain, CMT. The book, “The Alpha Formula; High Powered Strategies to Beat The Market With Less Risk “ combines… Hedge fund legend Ray Dalio’s brilliant insight into combining uncorrelated strategies… With new, minimally correlated, quantified, systematic strategies to trade… [Read More]

Buy The Alpha Formula Now

Connors Research Traders Journal (Volume 57): 7 Real-World Reasons Why Short Strategies Should Be Included In Your Portfolio

In our new book, The Alpha Formula – High Powered Strategies to Beat the Market with Less Risk, we show the benefits of including short-strategies in your portfolio. As a reminder, building portfolios should be based on First Principles – otherwise known as truths. These truths are: Markets Go Up Market Go Down Markets Go… [Read More]

Company Info

The Connors Group, Inc.
185 Hudson St., Suite 2500
Jersey City, NJ 07311
www.cg3.com

About Us

About
Careers
Contact Us
Link To Us

Company Resources

Help
Privacy Policy
Return Policy
Terms & Conditions

Properties

TradingMarkets
Connors Research

Connect with TradingMarkets

Contact

info@cg3.com
973-494-7311 ext. 628

Free Book

Short Term Trading Strategies That Work

© Copyright 2020 The Connors Group, Inc.

Copyright © 2023 · News Pro Theme on Genesis Framework · WordPress · Log in