Leveraged Growth/Value ETFs

Leveraged Market Cap ETFs List
(click on symbol for data and articles)

ProShares Ultra Style ETFs
ProShares Ultra Russell1000 Value ETF (UVG)
ProShares Ultra Russell1000 Growth ETF (UKF)

ProShares Ultra Russell MidCap Value ETF (UVU)
ProShares Ultra Russell MidCap Growth ETF (UKW)

ProShares Ultra Russell2000 Value ETF (UVT)
ProShares Ultra Russell2000 Growth ETF (UKK)

What Are They?

• Like traditional growth/value ETFs, leveraged growth value ETFs offer a simple way to get exposure to US stocks by investment style.
• But unlike traditional growth/value ETFs, these ETFs provide double the performance of a traditional index. So if the Russell 1000 growth index rises by 1%, for example, the ProShares Ultra Russell1000 Growth ETF (UKF) would rise by 2%.
• Leveraged ETFs are able to do this by using by using options and futures contracts. Any funds not invested in them are deposited in a money market account or invested in bonds.
• The ProShares Ultra Style ETFs break down the US market into growth and style for large cap (Russell 1000), mid cap (Russell Midcap) and small cap (Russell 2000) indexes.

Why & How To Use Them

• According to Paul Marsh, "A large body of US-based evidence shows that there has been a higher long-run return, at least over the period from 1926-2000, from investing in value stocks". So many investors overweight value stocks, and using leveraged value ETFs is a "supercharged' way of doing that.
• The other rationale for splitting a portfolio into growth and value is that it provides rebalancing opportunities, as growth and value stocks go in and out of style.
• Longer-term investors can use leveraged ETFs to increase their exposure to an index without needing to borrow money on margin. For example, they can be purchased in retirement accounts which don't allow margin lending.

What to Look Out For

• Leveraged ETFs are riskier and more volatile than standard index ETFs, and can lead to greater losses.
• They tend to have higher expense ratios than standard index ETFs, even proportionate to the level of exposure. Also, the use of futures means that dividend income would be lower or non-existent.
• Leveraged ETFs perform poorly in flat markets, and can underperform their benchmarks in conditions of significant volatility.

Further Reading

• Tristan Yates and Lye Kok discuss the risk that leveraged ETFs will produce sub-par long term performance in Leveraged ETFs: A Value Destruction Trap? and The Case Against Leveraged ETFs. Christopher Baldwin also comes out against leveraged ETFs in Clear Proof Against Leveraged ETFs.
• However, Brett Steenbarger shows in Are ProShares Ultra ETFs Used As Hedging Devices By Money Managers? that trading volumes for leveraged ETFs have grown strongly.
• Uses of leveraged ETFs are discussed in Leveraged ETFs For Upside Juice and Downside Protection and in Brad Zigler's Leverage and Inversion: A New Look for ETFs.
• Leveraged ETFs also include Leveraged Market Cap ETFs and Leveraged Sector ETFs.

This page is part of The Seeking Alpha ETF Selector which sorts ETFs by type, highlights how to use them and what to look out for, and provides links to articles that discuss key issues for investors.

Comments

[Tristan Yates:]

Thanks for the link to our article. Check out this chart: SSO vs the S&P 500 Index. Since July the S&P Index is up 20% and the 2X fund is only up 30%, not 40%. That's a lag of about 7.5% over the period.

finance.yahoo.com/q/bc...;t=1y&l=off&am...

For the long term impact, look at the ProFunds UltraBull fund, which started in November 1997 as ULPIX, and has lost money in the past 9.5 years, even though the index is up +40% since then. You can find similar short-term and long-term underperformance in just about every leveraged fund/ETF.

Some of it could be because of expense ratios and interest, but I believe that most of it is due to the selling required when trying to maintain a constant leverage ratio in a falling market. Whenever I model a constant leverage portfolio that goes through any kind of downturn, it ends up selling off all of its shares in the downturn and can never come back in the next rally. But I'm open to competing theories/analysis.

2007 Apr 29 04:56 PM