The use of leverage has always intrigued investors to increase returns despite the increased downside risk. The ETF arena features a stable of 2X and 3X leveraged funds covering various areas.
The fact that some of these sport high daily trading volumes supports their popularity. For example TNA (3X bullish S&P; 500) has an average daily trading volume of $500 million while SDS (2X bearish S&P; 500) has over $1 billion.
If you are an aggressive investor, who wants to play with fire, there are a few things you need to know as ETF Trends reports in “Spice Up Your Portfolio With Leveraged ETFs:”
* Returns are only meant to reflect the daily performance of a fund’s underlying index. Each day, these ETFs “reset” and over time, this can lead to a fund not staying in perfect line with its benchmark.
* In normal markets, this effect can work in your favor. In volatile markets, the compounding effect is exacerbated and the longer you hold a fund, the further it may stray from its benchmark.
* These funds are meant for daily use; if you hold them longer, just be aware that there may not be a 1-to-1 tracking of the underlying benchmark.
I believe that these ETFs are suited only for the most aggressive investors with deep pockets. The speed with which you can make or lose money during fast moving markets boggles the mind. I have one well capitalized client who likes to “play” with some of these ETFs and making or losing $50k can often happen in minutes.
It’s a trader’s paradise but a long-term investor’s nightmare. Stick to what you are comfortable with and leave the high risk ETFs for those who have the stomach and the funds to handle a wild ride.