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 (NYSEARCA: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.
- 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.