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3 Different Types of Leveraged ETFs to Ride the Bull Market

Lawrence Meyers

Yee-haw! If you’re a Cowboy-type investor, then you’re probably looking to ride this crazy bull market till you get tossed. That’s my ridiculous way of saying that this bull market continues to blaze along, despite it being very long in the tooth. It is the second most expensive market in history, and is about 30% overvalued.

Still, FOMO seems to continue to drive prices higher. Now, you should have a diversified long-term portfolio with many forms of low-volatility, non-correlated investments like The Liberty Portfolio, my stock advisory newsletter.

However, I recognize that some people want to try and milk what they can out of this insanity while it lasts. That means taking on lots of risk (which I don’t advise), and going after huge gains by riding the wave. So for those of you out there that fit this category, have a look at these leveraged ETFs that will supercharge returns … as long as you don’t get too greedy.

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Leveraged ETFs to Buy: S&P 500 ETFs

Leveraged ETFs to Buy: S&P 500 ETFs

Source: 401(k) 2012 via Flickr

The simplest and most straight-up leveraged ETFs play on the stock market is probably the Direxion Large Cap Bull 3X Shares (ETF) (NYSEARCA:SPXL). The way this fund works is that it uses debt to grab these higher returns, hence the term “leveraged.” With a 3:1 leverage ratio, the SPXL matches each dollar of invested capital with $2 of invested debt. That debt may take the form of futures contracts or other derivatives.

There are similar leveraged ETFs that aim for this 3x return. The ProShares UltraPro S&P 500 (NYSEARCA:UPRO) uses swap contracts for leverage. A swap contract is one in which two parties exchange some form of financial instrument.

If 3x leverage feels like riding the crazy train, then you can always back off to 2x leverage. ProShares Ultra S&P 500 (ETF) (NYSE:SSO) has $2.3 billion under management and aims to double the daily return of the S&P 500 using both stocks and derivatives. It also has a dividend yield of 0.33% which helps cover the 0.90% expense ratio.


Leveraged ETFs to Buy: Nasdaq 100 ETFs

Leveraged ETFs to Buy: Nasdaq 100 ETFs

Source: Shutterstock

That bad-boy of tech, the Nasdaq 100, is another aggressive way to play the bull market. The top six stocks account for 41% of the total asset base, and that means you are effectively buying a ton of those big famous names in tech: Apple Inc. (NASDAQ:AAPL), Microsoft Corporation (NASDAQ:MSFT), Amazon.com, Inc. (NASDAQ:AMZN), Facebook Inc (NASDAQ:FB) and Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL).

Thus, if you buy the ProShares Ultra QQQ (ETF) (NYSEARCA:QLD), you are not only taking on 2x the daily return of the Nasdaq 100 index, but fully 41% of your performance is going to be dependent on those six stocks, which is very aggressive when it comes to even leveraged ETFs.

Naturally, if you are feeling even more bold, ProShares UltraPro QQQ ETF (NASDAQ:TQQQ) will deliver 3x the daily return, which means you are anchoring yourself to those six juggernauts. If they soar, you soar. If they crash, then … ouch.


Leveraged ETFs to Buy: Sector ETFs 

Leveraged ETFs to Buy: Sector ETFs 

Source: Shutterstock

Why stop with the Nasdaq 100 for leveraged ETFs? If you truly want to put your money on the wheel of fortune, you can buy triple-leveraged sector funds. This is where things get absolutely insane, and I don’t see how anyone could want to own these ETFs for more than a day or two.

Can you guess the top performing one-year return triple-leveraged sector ETF? If you think about it, you might get it. Think about the economy coming back. Think about the great results from Home Depot Inc (NYSE:HD). That’s right, it would be the Homebuilders and Suppliers, with a whopping 300% one-year return.

Direxion Daily Homebuilders & Suppliers Bull 3x ETF (NYSEARCA:NAIL) delivers 3x the daily investment results of the U.S. Select Home Construction Index. That includes the five big homebuilder companies, which alone account for 32% of the asset base, so you are tying yourself to home trends.

In fifth place for the one-year leveraged ETF return award comes the Direxion Daily Semiconductor Bull 3x Shs (NYSEARCA:SOXL). Its 150% one-year return is also driven by seven stocks accounting for almost a third of the asset base.

For all of these, don’t be foolish — use stop loss orders before you lose your shirt.

Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 23 years’ experience in the stock market, and has written more than 1,800 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.

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