The World of Leveraged ETFs

Even as the major indices have been setting records for intra-day and intra-week swings and volatility reaches never before seen heights, there are some stocks, who by their mechanics, are destined to move even faster. Welcome to the world of 2x and 3x ETFs. These guys use debt and or derivatives to generate double or triple the daily return of the underlying asset they track. If the S&P 500 moves 1% percent, then for example, the Direxion Daily S&P 500 Bull 3X ETF (NYSE: SPXL) will, in theory, move higher by 3%. Likewise, if the S&P 500 moves down 1%, then the Direxion Daily S&P 500 Bear 3X ETF (NYSE: SPXS) will in theory fall by 3%.

However, the vice versa of these examples also holds true. Sounds scary all of a sudden? You’re not alone.

These leveraged ETFs, for want of a better expression, exist for most fundamental assets like indices and commodities and can make kings and paupers of investors during times such as these that we’re living through.

Indices

As mentioned already, the S&P 500 has a couple of these leveraged ETFs to its name. SPXL went live in November 2008, right in the middle of the crash. However, for any believers who were buying when everyone else was selling, there was a 3,700% rally to be had from the end of that year through the start of this year. To be sure, you’d have taken a few double-digit percentage haircuts on the way and nowhere is this better illustrated than in the past month. After almost a decade of those startling returns, SPXL has since shed 75% of its value in the past 4 weeks as markets around the world spiral lower in the face of the coronavirus pandemic.

That’s not to say there haven’t been opportunities to catch the other side though. SPXS, long the uglier sister as the longest bull market in history marched forward for the better part of ten years, is finally getting its moment in the spotlight. After losing well over 90% of its value through the start of 2020, any astute investor who added shares of it to their portfolio as protection in recent weeks would have seen upwards of a 100% jump in their value.

Outside of the S&P 500, investors can gain magnified exposure to the likes of the NASDAQ through the ProShares UltraPro QQQ ETF (NASDAQ: TQQQ) and to volatility via the VIX and the VelocityShares Daily 2x VIX Short-Term ETN (NASDAQ: TVIX). With the VIX index, Wall Street’s fear gauge, spiking to its highest since 2008, it’s no wonder that TVIX was able to offer investors almost 3,000% in returns since early February.

Commodities

Commodities are well known for the crazy moves they can make as fundamentals shift overnight, and their 3x cousins can also be used to gain magnified exposure. VelocityShares 3x Long Crude Oil ETN (NYSE: UWT) has been pummelled in the past week as crude oil has sunk to decade lows in the face of geopolitical tensions amongst the major producers. Having given investors a 75% rally from the end of last summer through the start of this year, it’s since sank 98% and has become a penny stock for the moment.

Leveraged gold ETFs have been a cult favorite for a while too and the Direxion Daily Junior Gold Miners Index Bull 3X Shares (NYSE: JNUG) along with its sister Direxion Daily Junior Gold Miners Index Bear 3X Shares (NYSE: JDST) have certainly kept investors on their toes in recent weeks.

Buyer Beware

While the thought of these triple-digit percentage returns can be alluring, extra caution is required to trade them successfully given that their sole purpose is to magnify the moves of the underlying. Many a trader has been carted out having gotten on the wrong side of a face-ripping rally or crash. On top of that, they tend to have above-average expense ratios and fees. The experienced investor will look to them to often times hedge their portfolio over a weekend or through a particular choppy period and maybe, just maybe from time to time, to see if they can catch the right wave and ride it all the way home.