Like any financial instrument, leveraged ETFs only work for you if you use them appropriately. For example, if you use a buy-and-hold strategy for all the assets in your portfolio, leveraged ETFs might not be for you. But if you take a more active approach over your portfolio, they can be a good tool to make plays in specific sectors.
In that spirit, here are the best and worst times to trade leveraged ETFs.
Good time: In trending markets
Leveraged ETFs perform best when there is a clear, directional trend in the market. By “best” we mean they deliver multiplied returns or multiplied inverse returns of the target index. Leveraged ETFs are far less likely to deliver on their objectives when the market is flat or within a trading range.
Bad time: When you don’t have a clear thesis
A leveraged ETF is not something to “dabble” in. You should not buy a small amount of one with the intention of “figuring the rest out later.” Because of their use of margin, leveraged ETFs can make gains (or give them back) in a hurry. So you really need to have a clear reason for getting in, and a clear timeline for when and why you would want to get out.
Good time: When you want to hedge another position
Just like other hedging tools, leveraged ETFs can be a great way to protect from downside on other investments or trades. For example, if you are long the crude oil market heading into a big OPEC meeting, the Direxion Daily S&P Oil & Gas Exp. & Prod. Bear 3X Shares (NYSE: DRIP) ETF will provide short-term protection if the news ends up being bad for the oil sector.
Bad time: When you can’t monitor your positions
Leveraged ETFs are hands-on vehicles. This is partly why they are so popular among day and swing traders. But these are people who are actively managing their trades—they have the mindshare to closely watch leveraged ETFs.
If you are only checking your portfolio once a week, or once every few weeks, leveraged ETFs are not for you. They need to be monitored, with targets on the upside and downside to lock in gains and minimize losses.
This article was written in conjunction with Direxion.
An investor should carefully consider a Fund’s investment objective, risks, charges, and expenses before investing. A Fund’s prospectus and summary prospectus contain this and other information about the Direxion Shares. To obtain a Fund’s prospectus and summary prospectus call 866-476- 7523 or visit our website at direxioninvestments.com. A Fund’s prospectus and summary prospectus should be read carefully before investing.
Direxion Shares Risks – An investment in the Fund involves risk, including the possible loss of principal. The Fund is non-diversified and includes risks associated with the Fund concentrating its investments in a particular industry, sector, or geographic region which can result in increased volatility. The use of derivatives such as futures contracts and swaps are subject to market risks that may cause their price to fluctuate over time. The Fund does not attempt to, and should not be expected to, provide returns which are three times the performance of its underlying index for periods other than a single day. Risks of the Fund include Effects of Compounding and Market Volatility Risk, Leverage Risk, Counterparty Risk, Intra-DayInvestment Risk, Daily Index Correlation/Tracking Risk, Other Investment Companies (including ETFs) Risk and risks specific to investment in the securities of the Industrials Sector. Please see the summary and full prospectuses for a more complete description of these and other risks of the Fund.
Distributor: Foreside Fund Services, LLC.
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