Over the past decade, Exchange Traded Funds (ETFs) have gained tremendous popularity due to the advantages and flexibility they offer investors including cost effectiveness and transparency.
Investors have embraced these factors as total ETF industry assets currently stand at $2.17 billion. Year-to-date, assets have risen 2.0% and the number of ETFs has increased 1.1% with 43 new funds launched. (as published by XTF ETF Experts).
More than 1,800 ETFs and ETNs are currently trading on the market, leaving investors paralyzed by choice more than anything these days.
One area that probably isn’t suitable for long-term investors, but has been a big part of the ETF industry’s growth, is the leveraged and inverse ETF market. Here, funds can certainly be great money-making avenues for day traders, but they are inherently volatile and often misunderstood. It is best to take a look at this space in a bit more detail before jumping in as part of your investing portfolio.
Leveraged ETFs in Focus
Traditionally, leveraged funds provide 2x or 3x the return of the benchmark performance. For example, a fund that provides 2x the exposure will rise by 2% if the benchmark rises by 1%; however, the flip side also holds true. If the index falls by 1%, the ETF will lose 2%.
On the other hand an inverse leveraged ETF bets against the positive movement of the underlying index, usually over a single day. Most of these products rebalance at the end of every session, and are built to give investors the corresponding amount of leverage over a single trading period.
So, in order for the investors to profit from these highly complex instruments, it is prudent for them to understand three things:
1. What actually is the product betting on?
2. How does it plan to achieve returns 2x and 3x the index?
3. How often does it trade on a daily basis in order to ensure tight bid ask spreads?
This last factor is very important for investors seeking to achieve the best price for their trade. For this reason, and given how volatile the leveraged market can be, obtaining a good price can be vital for overall returns.
In light of the above statement, we have highlighted 10 of the most popular (i.e. with maximum average daily volume) leveraged ETFs that are available to investors.
ProShares Ultra S&P 500 ETF SSO tracks the S&P 500 Index, and seeks investment results that correspond to 2x the daily returns of the index. It charges an expense ratio of 89 basis points, and uses swap contracts to achieve the leverage it strives for. SSO has an asset base of $1.6 billion coupled with an average daily volume of 5.0 million shares.
Like SSO, ProShares UltraPro S&P 500 ETF UPRO tracks the S&P 500, but seeks to provide 3x the returns of the index. The ETF also charges an expense ratio of 95 basis points, and uses swap contracts as well. UPRO has attracted $811.00 million in its asset base with an average daily volume of 3.6 million shares.
It is important to note that both of these ETFs are rebalanced at the end of day, therefore returns may not be equal to their stated objective of 2x or 3x the index returns over long-term periods.
The ProShares Ultra Dow30 ETF DDM is the appropriate choice for investors seeking a leveraged play on the Dow Jones Industrial Average Index. The ETF has been able to amass $243.28 million in its asset base since its inception back in June of 2006. DDM is rebalanced on a daily basis and provides exposure of 2x the daily returns of the Dow Jones Industrial Average Index. It uses a variety of Index swaps to achieve its stated leverage.
Launched in June of 2006, the ProShares Ultra QQQ ETF QLD seeks to provide 2x the daily returns of the Nasdaq100 Index. The ETF has a fairly large asset base of $933.71 million and charges 0.95% as expense ratio. The ETF enters into swap contracts with different financial institutions to provide the leveraged exposure. QLD also has a very high average daily volume of around 2.0 million shares (see The Apple Effect and Nasdaq ETFs).
The Direxion Daily Small Cap Bull 3X Shares (TNA) and ProShares Ultra Russell2000 (UWM) are two ETFs which provide investors with a leveraged play on the Russell 2000 index.
TNA provides 3x leveraged exposure whereas UWM provides twice the daily returns of the Russell 2000 index. TNA also exhibits popularity as indicated by its asset base of $843.48 million, and has an average daily volume of 5.8 million shares (see Three Small Cap ETFs with Impressive Yields).
On the other hand, UWM also enjoys a lower average daily volume of 249,845 shares and has been able to amass around $157.52 million since its inception in January of 2007.
Both of these ETFs utilize index swaps to provide the stated leverage. TNA charges an expense ratio of 98 basis points; however, UWM is slightly more expensive than TNA charging 0.96%.
The Direxion Daily Financial Bull 3X Shares (FAS) is an ETF that provides a leveraged play on the financial sector. It seeks investment returns that correspond to 3x the daily returns of the Russell 1000 Financial Services Index.
The index includes stocks of financial services companies from the entire spectrum of market capitalization. With an asset base of $1.18 billion, FAS is one of the most popular leveraged financial equity ETFs. It charges investors 0.97% as expenses, and on an average does about 4.9 million shares daily.
The Direxion Daily Energy Bull 3X Shares (ERX) provides a leveraged exposure on the energy sector. It strives for 3x the daily returns of the Energy Select Sector Index, which measures the performance of companies from the oil and gas, consumable fuels, oil and gas equipments and services etc.
ERX aims for the leverage by entering into index swap contracts with different financial institutions. It charges an expense ratio of 1.00% and does an avergae 3.3 million shares daily in volume. It has an asset base of $521.15 million (read Uncertain about the Economy? Try Market Neutral ETFs).
The ProShares Ultra Silver ETF (AGQ) seeks 2x the daily returns of silver bullions which are U.S Dollar denominated for London delivery. This means that along with the volatility in the individual commodity price, the ETF will also be subject to currency exchange rate between the U.S Dollars and the Pound Sterling.
Obviously being a leveraged ETF the fund takes long positions derivative instrument like silver futures and enters into silver forward contracts with different financial institutions to gain leverage on the underlying asset class (i.e. silver bullion).The ETF is also rebalanced daily and has an expense ratio of 1.67%. AGQ has a an asset base of $257.31 million and an average daily volume of about 200,600 shares.
ProShares Ultra 7-10 Year Treasury (UST) is a daily rebalanced leveraged long ETF which is designed to generate 2x the daily returns of the Barclays Capital U.S. 7-10 Year Treasury Index. The index measures the performance of intermediate term Treasury bonds which have a residual maturity ranging from 7 to 10 years. UST has $51.74 million in its asset base, and sees an average daily volume of 63,019 shares. It charges an expense ratio of 95 basis points.
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DIRX-SC BULL 3X (TNA): ETF Research Reports
PRO-ULTR S&P500 (SSO): ETF Research Reports
PRO-ULTR QQQ (QLD): ETF Research Reports
PRO-ULT S&P500 (UPRO): ETF Research Reports
PRO-ULTR DOW30 (DDM): ETF Research Reports
PRO-ULTR R2000 (UWM): ETF Research Reports
PRO-ULT SILVER (AGQ): ETF Research Reports
DIR-EGY BULL 3X (ERX): ETF Research Reports
DIR-FIN BULL 3X (FAS): ETF Research Reports
PRO-ULT 7-10 YT (UST): ETF Research Reports
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