How to Profit from Leveraged ETFs

Source: ProShares

Leveraged ETFs are a type of exchange-traded fund used by people who like to speculate.

An ETF is a security that trades on an exchange like the New York Stock Exchange and tracks the performance of an index such as the S&P 500. Leveraged ETFs are like ETFs on steroids. They take on debt or use the help of financial instruments like derivatives to increase the returns of the underlying index.

Think of them as an amplifier to a regular ETF. With a double-leveraged ETF, if the S&P 500 rose by 1% in one day then the leveraged ETF would increase by 2%. A triple-leveraged ETF would increase by 3%.

Naturally, these funds are highly volatile and present a huge risk to anyone trading them. Leveraged ETFs have grown popular amongst day traders because returns can be generated very quickly. It’s possible to profit but be prepared for plenty of ups-and-downs along the way.

Profiting from leveraged ETFs

Avoid Long-Term Trades

Anyone willing to take advantage of leveraged ETFs must avoid holding trades for too long. Holding leveraged ETFs for too long has the potential to quickly erode the value of your trading portfolio.

This is due to a few reasons. First, leveraged ETFs tend to have high expense ratios or management fees. Often they are twice as expensive as their more vanilla ETF counterparts.

That’s just the beginning. In addition to expense ratios, investors must bear the cost of re-balancing.

For example, let’s say you have a double-leveraged fund with $10 million in assets and $20 million exposure. The underlying index rises 1% in one day, and you make $200,000 (excluding expenses). The fund’s assets have increased to $10.2 million in assets, and total exposure has to be adjusted so that it is $20.4 million.

Leveraged ETFs are always making changes and adjustments like this and the longer you hold on, the more fees you are required to pay.

Use options

An option gives an investor the right, but not the obligation, to sell a security for a pre-agreed upon price. While this strategy should be reserved for more experienced investors, options can help reduce the inherent risk that comes with leveraged ETFs.

The beauty of options is that you are not required to do anything. If you own a leveraged ETF whose price drops then you can offload those ailing shares to another investor with whom you’ve drawn up an options contract. That investor is obligated to buy the securities at a higher price, and you get to decide whether or not to enforce it.

Manage your losses

Before trading leveraged ETFs, you must be able to handle losses better than the average investor. More than anything else, this is the most important part of working with these types of funds. They reset their exposure every day, so daily returns are amplified and compounded over time. Compounding works both ways, so consecutive down days can take their toll.

Understand all the risks and take appropriate steps to manage your losses and your psychology.

The Bottom Line

Trading leveraged ETFs can net investors large profits.  However, they possess a high risk especially to newer or inexperienced investors who typically engage in long-term trading.  Nonetheless, they are a great tool for wealth creation when you know which strings to pull.

January 2, 2021 Update: We have just announced our BEST STOCK NEWSLETTER of 2020 AWARD!

CLICK HERE to find out which stock newsletter was up 78% in 2020 (and whose 2019 picks are now up 113%).

*** Our Award for BEST STOCK NEWSLETTER of 2020 ALERT ***

Updated January 2, 2021

At WallStreetSurvivor, we subscribe to dozens stock recommendation and advisory newsletters. There is ONE newsletter that is constantly outperforming all of the others--The Motley Fool Stock Advisor.

Five of their 2020 stock picks have doubled and the average return of all 24 of their stock picks for 2020 is up 78%!

We have been tracking ALL of the Motley Fool stock picks since January 2016. That's 5 years and 120 stock picks. As of Friday, January 1, 2021 the Motley Fool's January stock pick (TSLA) is up 720%, their March pick (ZM) is up 172%, their April pick of SHOP is up 226% and their June pick CRWD is up 120%; and another two have more than doubled. In addition, 10 of their 2019, 12 of their 2018, 11 of their 2017, 15 of their 2016. Most impressively, over the last 5 years that we have been tracking every recommendation, their average stock pick is up 209%--tht means over the last 5 years their stock picks, on average, have TRIPLED!

Now no one can guarantee that their next picks will be as strong, but our 5 years of experience has been super-profitable. The important thing about the Fool stock picks is you have to buy them the day they are recommended because they usually pop 5-10% in the first 72 hours after the release their recommendation. You sure don’t want to risk missing out on their next pick.

Normally the Fool service is priced at $199 per year but they are currently offering a NEW SUBSCRIBER DISCOUNT that allows you to get theiir next 24 stock picks for just $99/year. HERE is the LINK to visit their New Subscriber Discount page.

CLICK HERE to get access to all The Motley Fool’s Stock Picks and their next 12 months of picks for just $99 per Year! 



GET UP TO $1,000 IN FREE STOCK

WHEN YOU OPEN A ROBINHOOD BROKERAGE ACCOUNT

Robinhood was the first brokerage site to NOT charge commissions when they opened in 2013. They just past 10,000,000 accounts and to celebrate they are offering up to $1,000 in free stock when you open a new account.

Here’s the details: You must click on a special promo link to open your new Robinhood account. Then when you fund your account with at least $10, you will receive one stock valued between $5 and $500. Then, you will get a link to share with your friends. Every time one of your friends opens an account, you will receive another free stock valued between $5 and $500. Click here to learn more about this Special Robinhood offer.

Claim your free stock NOW (before it’s too late)



Comments are closed.