Leverage is a risky strategy you can use to amp up your returns. If you have the stomach and resources to invest with leverage, then you may want to look at leveraged ETFs, which offer the benefits of leverage without having to actually leverage your money.
Leveraged ETFs basically come in two flavors: 2x and 3x. As the names imply, these funds will typically earn or lose you a multiple of the index it is tracking. For example, f you invested in Direxion Financial Bear 3X ETF (NYSEArca: FAZ), you would earn 30% on a 10% rise in the corresponding index or lose 30% on a 10% decline, says Jeff Reeves of Investor Place.
Three key things to remember are:
- 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.
Here are some popular leveraged ETFs:
- Direxion Financial Bull 3X ETF (NYSEArca: FAS)
- Direxion Small Cap Bear 3X ETF (NYSEArca: TZA)
- Direxion Small Cap Bull 3X ETF (NYSEArca: TNA)
- Direxion Large Cap Bull 3X ETF (NYSEArca: BGU)
- Direxion Large Cap Bear 3X ETF (NYSEArca: BGZ)
ProShares funds don’t use the 2x/3x notation. Rather, they have Ultra funds that are leveraged 2x and UltraPro funds that are leveraged 3x.
- ProShares UltraPro Dow30 (NYSEArca: UDOW)
- ProShares Ultra Financials (NYSEArca: UYG)
- ProShares Ultra Consumer Goods (NYSEArca: UGE)
- ProShares Ultra Technology (NYSEArca: ROM)
- ProShares UltraPro Short Dow30 (NYSEArca: SDOW)
- ProShares UltraShort Oil & Gas (NYSEArca: DUG)
- ProShares Ultra Health Care (NYSEArca: RXL)
- ProShares Ultra Dow30 (NYSEArca: DDM)
Sumin Kim contributed to this article.
Disclosure: Tom Lydon is a board member of Rydex|SGI (see here).