Leveraged ETFs have the potential for greater profits, albeit with increased risk.
Still, leveraged ETFs (LETFs) can be attractive to short-term investors. The Direxion Daily S&P Oil & Gas Exp. & Prod. For example, Bull 2X Shares (NYSE 🙂 has proven its popularity among Robinhood traders, landing it on the list of the 100 most popular stocks on the Internet.
GUSH is a "2x" LETF, which typically uses derivatives to enhance the performance of an underlying index.
LETFs are available on many ETFs that track indices, such as the and indices, as well as commodities, such as and .
While a traditional exchange-traded fund usually tracks the securities in the underlying index one-to-one, a leveraged ETF can target a two-to-one (2x) or three-to-one (3x ). ratio.
Below we'll break down key features you should know about leveraged ETFs before investing:
Bull and Bear Funds
Mostly On Marketed as bull or bear, leveraged ETFs offer investors the option of taking inverse or short funds. For example, the ProShares Ultra QQQ ETF (NYSE 🙂 looks for daily investment results that match twice (2x) the daily performance of the .
On the other hand, the ProShares UltraPro Short QQQ (NASDAQ 🙂 looks for daily investment results that match three times the inverse (-3x) of the daily performance of the NASDAQ 100 index. Thus, a trader going long on an inverse LETF is effectively shorting the underlying index without initiating a short trade, which would likely have tighter margin requirements.
On a daily basis, QLD and SQQQ seek to achieve returns that are "2x" or "-3x" the daily index return, respectively, meaning it "triples the profit" or "loss" of the market. on a given day
The keyword & # 39; Daily & # 39; are
One of the main features of LETF & # 39; s is daily rebalancing. Let's consider the example of the Direxion Daily Junior Gold Miners Index Bull 2X Shares (NYSE 🙂 .
JNUG tracks the MVIS Global Junio ?? r Gold Miners Index () and aims for 200% or -200% – 2x the return of this benchmark index for one day. This daily leverage gives JNUG certain characteristics that are likely to make it an inappropriate long-term interest. This is why short-term traders use these LTEFs for targeted betting during the trading day.
In 2020, gold has experienced a surge, at about 30% year-to-date (YTD).
There are a wide variety of ETFs to track the price of the shares, including SPDR Gold Shares (NYSE 🙂 and SPDR Gold MiniShares (NYSE: ) – both of which are up about 31% this year.
There are also funds that invest in miners, such as the VanEck Vectors Gold Miners ETF (NYSE 🙂 and the VanEck Vectors Junior Gold Miners ETF (NYSE :), which are in 2020 by approximately 45% and 43% respectively. MVGDXJ, the index that JNUG tracks, is also up about 43% in 2020.
JNUG itself, however, is down more than 80% YTD. Another popular leveraged ETF, Direxion Daily Gold Miners Bull 2X ETF (NYSE: ) is also down more than 41% so far this year.
The main reason for the discrepancy between the LETFs and the ETFs they track: leverage.
A 2x LETF-like JNUG stock is structured to be used constantly 2x daily. This 2x long LTEF has to buy every day when the prices of underlying assets rise and sell when they fall. However, the compound effects of daily returns work against long-term investors.
Bottom Line
LETFs can be valuable investment tools. However, it is critical for market participants to realize that those who hold LETFs for longer than a day are exposing themselves to substantial risks.
We will take a closer look at specific leveraged ETFs in the coming weeks.
