Leveraged ETFs - Yeah or Nay?
Leveraged ETFs have become increasingly popular among short term traders, investors, the media and various regulating agencies recently. They are usually designed to seek a multiple of the performance returns of a Benchmark Index.
Prior to their increasing popularity, traders and investors would buy them with their only thought prior to opening a position being wanting to add a boost to their returns.
They initially were offered as "2x leveraged ETFs", or "Double Return" and come in "Inverse" relationships as well. "Inverse" meaning "opposite performance return".
As their popularity increased, they began offering them in "3x Leveraged ETFs" or "Triple Return" Funds. That's when the "mania" started to hit. Traders were jumping on board like crazy. Scalpers, Day Traders, Swing Traders and Long Term Investors were all joining in.
Then one day people started to notice that the performance results at the end of each day did not always match the Index the Leveraged ETF was tracking. Not just that, but over multiple days, weeks and months, the results were off even more in many cases.
This is when the complaints probably started to pour in to the regulators. What had happened was that many of the people using these securities for trading and investing did not realize what they were actually buying and selling. How many of you have ever read a "prospectus"?
I have looked at various charts comparing Leveraged ETFs performance in the past and found some that I would feel comfortable with trading intraday as well as Swing Trading for a few weeks at a time. The longest I would personally hold a position in any of them would be around 2-3 months based on charts I have researched. In the end though, the choice has to be your own.
Here is a 3 month chart showing a performance comparison between SPY, SSO and SDS. SPY being an ETF that seeks to track the S&P 500. SSO being a 200% ProShares ETF and SDS being a -200% (Inverse) ETF:
Using Leveraged ETFs for short term trading can be a successful trading alternative, but you must research each Fund to find out what you are trading and how they are designed and calculated. Also remember that if they trade during the day like a stock, they are also being priced according to market supply and demand, not the exact index it is designed to closely track. Again, do some research on the particular fund you wish to trade.
Here are a few links to research this topic further on your own:
All investments carry risk. Learning about the risk each investment carries will enable you to make a much better decision than if you just "jumped on the Bandwagon".