Leveraged ETFs that will electrify your gains
Investing

3 Leveraged ETFs that will Electrify Your Gains

But at what price?

Leveraged ETFs have a way of attracting dreamers. Investors dream of the massive upside potential, typically with blinders to the possible portfolio destruction these instruments can inflict. The following Leveraged ETFs may seem like a great idea, especially when looking at their specific metrics as compared to the S&P index, but be warned. With great potential comes great cost. We don’t yet have any idea how these instruments will act in a serious drawdown/bear market environment. The majority, if not all of these ETFs were created post 2009. With 3x Leveraged ETFs there is a possibility of the value reaching zero if the underlying index falls 33.3%.

The most recent example of a popular leveraged ETN implosion was the VelocityShares Daily Inverse VIX Short Term ETN, $XIV. Within a half hour of after-hours trading in February 2018, the multi-billion dollar ETN had vaporized to nothing. With that, let’s look at a couple of Triple Leveraged ETF’s with massive Upside (Downside) potential:

1. $UPRO: This Triple Leveraged S&P Index has a goal of mimicking 3x the daily movement of the S&P Index. Since 2010, the max drawdown for this ETF was -47%, the compound average growth rate has been 33.16%, best year was 118%, and the Sharpe ratio was .93. Compared with the S&P index’s Sharpe ratio over the past 10 years of 1.04. The average upside capture ratio is 354% and the downside capture was 299%.

2. $UDOW: This Triple Leveraged Dow Jones Index has a goal of mimicking 3x the daily movement of the DJIA Index. Since 2010, the max drawdown for this ETF was -49%, the compound average growth rate has been 33.73%, best year was 107%, and the Sharpe ratio was .96. Compared with the Dow Jones’ Sharpe ratio over the past 10 years of 1.06.The average upside capture ratio is 351% and the downside capture was 296%.

3. $TQQQ: This Triple Leveraged Nasdaq Index has a goal of mimicking 3x the daily movement of the Nasdaq. Since 2010, the max drawdown for this ETF was -49%, the compound average growth rate has been 46.67%, best year was 140%, and the Sharpe ratio was 1.05. Compared with the Nasdaq’s Sharpe ratio over the past 10 years of 1.16. The average upside capture ratio is 383% and the downside capture was 296%.

We can see from some of the metrics that the upside capture ratio is higher than you might imagine with each ETF capturing more upside than their daily goal. One thing to consider in addition to these risk factors are costs associated with the management of these funds, which are roughly 1% for each fund.

These ETFs should only be traded in your portfolio with very tight risk parameters. Namely; appropriate position sizing, hedges, and tight trailing stops. These instruments can run away quickly with losses and gains, and you must be very attentive in order to manage the destruction.

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