Leveraged ETFs are one of the most controversial trading
instruments to be introduced in recent years.
Many financial experts criticize leveraged ETFs as being too
complicated and too risky for the
. But leveraged ETFs are some of the professional trader's favorite
tools -- and who doesn't want to be on the same side as the smart
Let's strip away all the commentary and criticism to explain
exactly what a leveraged
is. Then you can decide for yourself if it's right for your
Leveraged ETFs are meant to double, or in some cases triple, the
daily performance of a particular
. Bearish leveraged ETFs attempt to deliver two or three times the
inverse of the daily performance.
The way these ETFs accomplish their objectives is a big part of
the controversy. They usually don't own or short stocks. Instead,
they use options, swaps and other derivatives to deliver outsized
Because leveraged ETFs are bundles of derivatives, investors
buy and hold
them the way they do plain vanilla ETFs. Derivatives have a
portion that decays as each day goes by. And because the leveraged
ETF portfolio needs to be constantly rebalanced, expenses can
really eat into investor returns. In fact, there are documented
examples on the SEC web site of a leveraged ETF that produced
negative returns even when the index it tracks moved up.
That's the bad news.
The good news is that when used properly, meaning over
short-term time frames, leveraged ETFs can be a great tool for
nimble investors who want to generate some quick profits. With that
in mind, let's have a look at some of the most popular
sector-specific leveraged ETFs.
Direxion Daily Financial Bull 3X Shares (
) & Direxion Daily Financial Bear 3x S
Even if you're not intimately familiar with leveraged ETFs,
you've probably already heard about FAS and FAZ. Both ETFs
track the Wilshire 1000 Financial Services Index and both ETFs were
front and center during the financial crisis that started in
FAS has an
of 0.85% and FAZ expenses check in at 0.95%, meaning neither are
cheap by the standards of traditional ETFs. But both ETFs are
, averaging daily volume of about 77 million shares between the two
Here's a great historical example of how powerful or problematic
these ETFs can be: When the financial crisis reached its apex in
late 2008, FAZ gained 65% from November 5 to November 18, while FAS
lost 45% over the same period.
Ultra Oil & Gas Proshares (
) & ProShares UltraShort Oil & Gas ETF (
Got a feeling that big things are afoot in the energy patch?
Then DIG and DUG are worth examining. Both ETFs track the Dow Jones
U.S. Oil & Gas Index, which is home to major oil companies like
) and Exxon Mobil (
) as well as some smaller, more obscure names. In total, the index
is home to 92 stocks.
DIG and DUG are double leveraged ETFs, meaning that if the Oil
& Gas Index moves 2% on a particular day, these ETFs should
each move roughly 4%. Like FAS and FAZ, DIG and DUG are not cheap
to own, with expense ratios of 0.95%.
The volatility that is seemingly always present in the energy
sector can really drive some remarkable returns in short order with
these ETFs. It would not be out of the realm of possibility to
easily make 10%-15% in a single week with either DIG or DUG, and
returns like that are just too compelling to ignore.
It may seem like ages ago, but in July of 2008, oil traded at
$147 barrel before starting a precipitous decline. DIG lost -35% in
45 days, but DUG booked a 45% gain over the same period. An average
gain of 1% per day is nothing to scoff at.
And if you're feeling particularly bold about the energy sector,
Direxion Daily Energy Bull 3X Shares (
or its bearish partner,
Direxion Daily Energy
3X Shares (
Ultra Basic Materials ProShares (
) & UltraShort Basic Materials ProShares ETF (
If you can stomach the volatility of energy stocks, then you may
want to check out the materials sector as well. The phrase "high
" definitely applies to many of the most well-known materials
names. UYM is essentially the leveraged counterpart to the iShares
Dow Jones U.S. Basic Materials ETF (
), which holds well-known stocks like Alcoa (
), Freeport McMoRan (
) and Newmont Mining (
UYM and SMN should deliver twice the daily performance of the
materials index tracked by IYM. Both UYM and SMN have expense
ratios of 0.95%, similar to other leveraged ETFs we've
Materials stocks are known to be quite volatile, so be warned
that UYM and SMN are going to ratchet up your risk profile. But the
potential exists to garner some robust gains in short time
Ultra Semiconductors ProShares (
) & UltraShort Semiconductor ProShares (
If you're bullish on stocks like Intel (Nasdaq: INTC) and Texas
), USD is the way to go. In fact, USD actually holds positions in
those stocks and several other chip makers, but also uses the same
techniques as other leveraged ETFs to amplify returns.
Technology stocks aren't as volatile as energy or materials
names, but the tech sector is one of the most widely followed
industry groups in the market, meaning both USD and SSG can offer
astute investors tidy returns. For example, in the two week period
from April 15, 2010 to May 2, 2010, USD plunged an astounding 25%,
but SSG soared 19%.
The ETFs we've explored here are a just a smattering of the
leveraged ETFs currently on the market. There are also leveraged
bullish and bearish ETFs that track the broader tech group,
real estate stocks and consumer services
Approach all leveraged ETFs with caution. If you remember to
keep your holding periods short, you may be able to lock in some