A Quick Investor Guide To The Most Popular Leveraged ETFs

June 24, 2015 by

leverage-decaySweta Killa: The U.S. bourses are once again hovering around their record highs irrespective of volatility and uncertainty. This trend is likely to continue at least in the short term since the looming rates hike is not expected anytime before late September or October, suggesting one more quarter of cheap money flows into the economy.

Additionally, a flurry of upbeat data including a strengthening job market, recovering housing fundamentals, rising consumer confidence and stepped-up economic activities will continue to drive the stocks higher. Further, lower oil price – the major threat to economic growth this year – has stabilized at the current levels.

Meanwhile, the fixed income market doesn’t look too bleak as the Fed will raise interest rates more slowly than many expected, putting a cap on the falling securities world over. However, as the economy gains strong traction, long-term interest rates will rise at a faster rate, dulling the appeal for long-dated bonds.

That being said, most investors are willing to make a short-term play in the financial world given the cloud over the timing of the hike. For them, leveraged products might offer compelling investment avenues given the money that these mint in a very short period of time provided the trend remains a friend.

Leveraged ETFs Explained

Leveraged funds provide multiple exposure (i.e 2x or 3x) to the daily performance of the underlying index by employing various investment strategies such as swaps, futures contracts and other derivative instruments.

While this strategy is highly beneficial for the short-term traders, it could lead to huge losses compared to traditional funds in fluctuating or seesaw markets. Further, their performances could vary significantly from the actual performance of their underlying index over a longer period when compared to the shorter period (such as, weeks or months) due to their compounding effect.

How to Play?

Given this, investors should make a right selection of the leveraged ETFs in their portfolio with a strong belief that this trend will persist for a specific period at least. While there are currently over 130 leveraged ETFs in the market targeting different asset classes, we have taken a closer look at the 10 most popular funds for short-term investors.

Here’s a handy guide to these ETFs that are hugely popular but not otherwise the best choices in their respective markets:

ProShares Ultra S&P500 ETF (NYSEARCA:SSO)

Leveraged Factor: 2x
Benchmark Index: S&P 500 Index

This is the most popular and liquid ETF in the leveraged space with AUM of $1.9 billion and average daily volume of over 6.3 million shares a day. The fund seeks to deliver twice the return of the S&P 500 Index, charging investors 0.89% in expense ratio. It has gained 4.6% so far in the year.

Direxion Daily Financial Bull 3x Shares (NYSEARCA:FAS)

Leveraged Factor: 3x
Benchmark Index: Russell 1000 Financial Services Index

This ETF seeks to make large profit from the bullish trend in the financial sector. It provides three times exposure to the performance of the Russell 1000 Financial Services Index. The fund has amassed nearly $1.3 billion in its asset base while trades in heavy volume of around 4.7 million shares. It charges 95 bps in annual fees and has gained about 8% in the year-to-date timeframe.

ProShares UltraPro QQQ (NYSEARCA:TQQQ)

Leveraged Factor: 3x
Benchmark Index: NASDAQ-100 Index

Investors seeking to ride out the soaring Nasdaq in a very short period of time could make a play on TQQQ. This is because it provides three times the return of the daily performance of the NASDAQ-100 Index and exchanges around 3 million shares in hand on average. The fund has AUM of $1.1 billion and charges 95 bps in fees and expenses. It has surged 14.8% so far in the year.

ProShares Ultra QQQ (NYSEARCA:QLD)

Leveraged Factor: 2x
Benchmark Index: NASDAQ-100 Index

This fund also tracks the NASDAQ-100 Index but offers twice the returns of the daily performance with the same expense ratio of TQQQ. It has managed AUM of $1 billion and sees just 0.5 million less in average daily volume. QLD had returned 13.8% in the year-to-date timeframe, 100 bps below its triple leveraged counterpart.

ProShares Ultra Bloomberg Crude Oil ETF (NYSEARCA:UCO)

Leveraged Factor: 2x
Benchmark Index: Bloomberg WTI Crude Oil Subindex

This fund provides leveraged play in the crude oil segment of the commodities market. It seeks to deliver twice the return of the daily performance of the Bloomberg WTI Crude Oil Subindex, which consists of futures contracts on crude oil. It has $934.7 million in AUM and trades in solid volume of more than 4.2 million shares a day on average. Expense ratio comes in at 0.95%. The ETF is down 9.6% in the year-to-date timeframe.  

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