Trading Single-Stock Leveraged ETFs For Historically High Percentage Gains

September 5, 2024
Larry Connors

Larry Connors' Trading Lesson of The Day | September 5, 2024

A number of traders have reached out to me recently asking me about Single-Stock Leveraged ETFs. They’ve become one of the fastest growing areas in trading, providing traders with additional leverage to trade their favorite stocks without taking on any additional margin.

Today’s lesson will explain what Single-Stock Leveraged ETFs are, and ways to trade them, especially for your short term, mean reversion trading (your swing trading).

Exchange-Traded Funds (ETFs) as a whole have revolutionized the way traders and investors access the markets, offering a broad range of strategies and exposures in a simple, liquid form. Like mutual funds, they hold a basket of securities. Unlike mutual funds, they offer full intraday liquidity, along with pre-market and after-market trading opportunities.

Among the newest innovations in the ETF space are Single-Stock Leveraged ETFs.

These funds are designed to provide amplified returns on individual stocks, allowing traders to achieve significant exposure without using margin accounts or options.

What is a Single-Stock Leveraged ETF?

Single-Stock Leveraged ETFs are a specialized type of ETF that seeks to deliver a multiple of the daily returns of a single stock.

Unlike traditional leveraged ETFs, which focus on indices like the S&P 500 or the Nasdaq-100, these ETFs are tied to the performance of a single company’s stock.

They allow traders to amplify their exposure to individual stocks, achieving returns of 1.25x, 1.5x, or even 2x the stock’s daily movement.

These ETFs are designed primarily for short-term trading and should be used with caution due to the risks associated with leverage, such as magnified losses and the potential for tracking errors over time.

How Do Single-Stock Leveraged ETFs Work?

Single-Stock Leveraged ETFs use derivatives like swaps and futures contracts to achieve their targeted daily return.

The goal is to multiply the performance of the underlying stock for a single trading day. For instance, if a stock rises by 1% in a day, a 2x leveraged ETF on that stock would aim to deliver a 2% return (before fees and expenses).

👉 It’s important to understand that the leverage is reset daily.

This means that the ETF is designed to provide the stated multiple of the stock’s performance only on a single trading day.

Holding these ETFs for longer periods can result in returns that deviate significantly from the expected multiple due to the effects of compounding and volatility.

Popular Examples of Single-Stock Leveraged ETFs

Single-Stock Leveraged ETFs have gained popularity due to their ability to offer targeted exposure to high-profile companies. Here are a few examples that have caught traders’ attention:

▶︎ TSLL (Direxion Daily TSLA Bull 2X Shares)

TSLL seeks to provide 2x the daily performance of Tesla, Inc. (TSLA). Given Tesla’s volatility and the interest surrounding the stock, TSLL is a popular choice for traders looking to capitalize on short-term price movements.

▶︎ AAPU (Direxion Apple Bull Daily 2X Shares)

This ETF aims to deliver 2x the daily performance of Apple Inc. (AAPL). Apple is one of the most valuable companies globally, and this ETF allows traders to enhance their exposure to the tech giant’s stock with a simple trade.

▶︎ NVDX

▶︎ T-REX 2X Long NVIDIA Daily Target ETF

This ETF aims to deliver 2x the daily performance of NVIDIA. (NVDA). NVIDIA is one of the most popular AI companies globally, and this ETF allows traders to enhance their exposure to NVIDIA’s stock with a simple trade.

Bear Single-Stock ETFs

Many of the major Single-Stock Leveraged ETFs also have bear shares, meaning if you’re bearish on the stock, you can buy the leveraged version in hopes of amplifying your daily returns if prices move lower in the company.

Advantages and Risks of Single-Stock Leveraged ETFs

Advantages:

→ Magnified Returns: These ETFs allow traders to achieve amplified returns on individual stocks, making them attractive for those with a strong conviction about a stock’s short-term movement.

→ No Need for Margin Accounts: Unlike buying on margin, which requires borrowing money, these ETFs allow leveraged exposure without the need for a margin account or the complexities of managing margin calls.

→ Simplified Trading: Traders can achieve the desired leverage with a single trade, avoiding the complexity of options or futures contracts.

Risks:

→ Magnified Losses: Just as returns are amplified, so are losses. A small adverse move in the underlying stock can result in significant losses in the ETF.

→ Tracking Errors: Over time, the daily reset mechanism can cause the ETF’s performance to diverge from the expected multiple, especially in volatile markets.

→ Short-Term Focus: These ETFs are not designed for long-term investment. Holding them for extended periods can lead to unexpected outcomes due to the effects of compounding.

Trading Signals

As I’ve shown for more than 20 years, major equity index ETFs trading above their 200-day moving average have quantified mean reversion characteristics.

For example, if you take SPY when it’s been above its 200-day moving average since 1992 (its inception) through the Summer of 2024 and buy it when its 4-period RSI is under 20 and exit when it’s above 55, you’ll see that prices have closed higher better than 70% of the time.

The same is true for other popular equity index ETFs including QQQ (QQQ’s start date is 1999 – its first year of trading over a quarter of a century ago).

Individual stocks, especially in the S&P 500, have shown the same type of behavior, but the entry requires a further pullback.

Look at the larger S&P 500 stocks when their 4-period RSI reading is under 10 and the stock price is above their 200 day ma over the past 25 years. Use a 4-period RSI of 55 as the exit. The percent correct has been high and this offers traders an opportunity to systematically identify historically high probability trades.

Single-Stock Leveraged ETFs are newer and have been trading for a far shorter period of time. Also, they track the daily movement of the stock, not the longer term. This isn’t as much of a major factor if you’re swing trading and holding positions on average 3-7 trading days.

Therefore, when AAPU, the Single-Stock Leveraged ETF for Apple, has a 4-period RSI reading under 10 while it’s above its 200-day moving average, it’s often a good time to place on the trade. Historically this oversold position has led to rallies over the next 3-7 trading days a large percentage of the time.

Conclusion

Single-Stock Leveraged ETFs are powerful tools that can offer significant opportunities for traders with a short-term horizon.

They provide a straightforward way to gain amplified exposure to some of the market’s most popular stocks without the need for margin accounts or complex derivative strategies. However, with the potential for magnified losses and the intricacies of daily leverage resets, these ETFs require careful management and a clear understanding of the risks involved.

For traders looking to take advantage of short-term price movements in high-profile stocks like Tesla, Apple, NVIDIA, Amazon and many others, Single-Stock Leveraged ETFs can be a valuable addition to your toolkit. But as always, it’s essential to approach these instruments with a disciplined strategy and an awareness of their unique characteristics.

In the near future, in my Trading Lesson of the Day, I’ll provide you with additional strategies to trade Single-Stock Leveraged ETFs. Today’s lesson is to give you the proper baseline knowledge, along with RSI levels to look at to begin trading these instruments.

If you have any comments or questions on today’s Trading Lesson, please feel free to send them to me at lconnors@cg3.com.

Disclaimer: Nothing in this e-mail should be considered personalized advice. The Connors Group, Inc. (“Company”) is not an investment advisory service, nor a registered investment advisor or broker-dealer and does not purport to tell or suggest which securities or currencies customers should buy or sell for themselves. Although our employees may answer your general customer service questions, they are not licensed under Federal and State Securities law to address your particular investment situation. Hence no communication by our employees to you should be deemed as personalized investment advice. Furthermore, the analysts and employees or affiliates of Company may hold positions in the stocks, currencies or industries discussed here. You understand and acknowledge that there is a very high degree of risk involved in trading securities and/or currencies. The Company, the authors, the publisher, and all affiliates of Company assume no responsibility or liability for your trading and investment results. Factual statements on the Company’s website, or in its publications, are made as of the date stated and are subject to change without notice. Company assumes no responsibility or liability for any trading and/or investment results that you may obtain by using such information. It should not be assumed that the methods, techniques, or indicators presented in these products will be profitable or that they will not result in losses. Past results of any individual trader or trading system published by Company are not indicative of future returns by that trader or system, and are not indicative of future returns which be realized by you. In addition, the indicators, strategies, columns, articles and all other features of Company’s products (collectively, the “Information”) are provided for informational and educational purposes only and should not be construed as investment advice. Examples presented on Company’s website are for educational purposes only. Such set-ups are not solicitations of any order to buy or sell. Accordingly, you should not rely solely on the Information in making any investment. Rather, you should use the Information only as a starting point for doing additional independent research in order to allow you to form your own opinion regarding investments.

You should always check with your licensed financial advisor and tax advisor to determine the suitability of any investment.

HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING AND MAY NOT BE IMPACTED BY BROKERAGE AND OTHER SLIPPAGE FEES. ALSO, SINCE THE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THE RESULTS MAY HAVE UNDER- OR OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN.