The stock market can be a very volatile arena with stocks moving up and down rapidly. Another arena that has such sudden and wide moves are ETFs that use leverage. You may be surprised at just how much an ETF can swing and how fast.
Leveraged ETFS are meant for these kind of swings as they are designed to magnify performance. When you’re not on the right side, you may be finding yourself in a very bad situation. To sum it up… if you’re on the wrong side there could be losses, lots of losses. If you’re on the right side though, there could be maximum profits to capitalize on.
Trading leveraged ETFs have become a popular way of trading for many investors, but the opinions about them are contrasting depending on who you ask. Many traders love these ETFS because it can lead to a quick double on their account while others hesitate to even touch them because of the fear of losing a lot of money.
Leveraged ETFs have grown in popularity with the trading crowd moreso because they can generate returns very quickly. These ETFs can offer a great trading opportunity as long as you know what you are doing and weigh all the risks.
According to Investopedia, “a leveraged exchange-traded fund (ETF) is a fund that uses financial derivatives and debt to amplify the returns of an underlying index. These funds aim to keep a constant amount of leverage during the investment time frame, such as a 2:1 or 3:1 ratio.”
Before you even jump into trading these volatile beasts, investors should be aware of what it is that they track. There are two-to-three times the potential of upside and downside moves.
Some of the most popular leveraged ETFs on the market and the asset or assets that they track include:
Direxion Daily Gold Miners Index Bull/Bear 3x Shares — The Direxion Daily Gold Miners Index Bull 3x Shares (NUGT) and the Direxion Daily Gold Miners Index Bear 3x Shares (DUST) track the New York Stock Exchange (NYSE) Arca gold miner’s index. This index can be swayed by geopolitical news, natural disasters, and news about U.S. monetary policy. Even fluctuations in the U.S. dollar can affect this ETF.
ProShares Ultra Bloomberg Crude Oil/UltraShort Bloomberg Crude Oil — The ProShares Ultra Bloomberg Crude Oil (UCO) and the ProShares UltraShort Bloomberg Crude Oil (SCO) track the Bloomberg WTI Crude Oil Subindex. This subindex is affected by moves in oil prices due to geopolitical events as well as North American supply and demand.
The Direxion Daily Small Cap Bull 3x Shares (TNA), Direxion Daily Small Cap Bear 3x Shares (TZA), ProShares UltraPro S&P 500 (UPRO), ProShares UltraPro Short S&P 500 (SPXU), ProShares UltraPro (TQQQ) and the UltraPro Short QQQ (SQQQ), all track major U.S. benchmark indices. These indices can be affected by several things including: geopolitical events, volatility in international equity markets, economic reports and Federal Reserve announcements, earnings reports by major companies, and volatility in the bond markets and futures markets.
It’s imperative to consider stop losses due to the volatility of these ETFs and to not hold shares overnight. Global events can seriously wreak havoc on your trades!