Leveraged ETFs review and strategies for Investors
Leveraged ETFs can sometimes be useful investments that can be used to amplify the investment portfolio return if deployed with careful strategies.
They involve a lot of risks and are not everyone. Investors with low-risk tolerance should stay away from leveraged ETFs, especially during periods of high volatility.
Equities around the globe are falling due to the Central Banks’ aggressive stance against inflation. Dow Jones average ETF DIA is down 13%, Standards& Poors SPY ETF SPY 16%, Nasdaq 100 QQQ ETF 26%, and Rusell 2000 small caps IWM ETF 19%
As to leveraged ETFs tracking these indexes, they are down double or triple the return of these indexes this year.
There is no doubt. It will be a challenging year for investors who did not predict the rise of inflation. It is hard to expect when Central Banks will stop raising rates.
We have a resilient job market leading investors to believe that the Fed will not stop raising rates till inflation has significantly come down.
Even though leveraged ETFs are risky investments, they can play a big role in hedging or speculation, especially during periods of market volatility.
Leveraged ETFs have produced excellent returns following the 2008 financial-economic crisis.
7 Best Leveraged ETFs for investors’ strategies
1. Leveraged ETF TQQQ: Proshares leveraged ETF TQQQ which tracks Nasdaq 100 has made close to 180% market return during the last five years.
These massive leveraged ETF returns have caught the attention of investors despite the possibility of significant loss of their capital during market downtrends.
Leveraged ETF TQQQ’s objective is to provide investors the triple return of the performance of Nasdaq 100 on the daily basis before fees and expenses.
Nasdaq is heavily allocated to technology stocks around 50%,
- Information Technology 50.89%
- Consumer Discretionary 16.42%
- Communication Services 15.94%
- Consumer Staples 6.22%
- Health Care 5.80%
- Industrials 3.38%
- Utilities 1.35%
- Not Classified 0.16%
Source: Invesco
2. Inverse Leveraged ETF SQQQ: Proshares of inverse leveraged ETF SQQQ which tracks Nasdaq 100 have made over 50% market return during this market downtrends.
Inverse ETF SQQQ is negatively correlated with the performance of the equity market. A small portion of the investment portfolio should be allocated as a hedge when investors are anticipating the market decline of technology stocks.
Inverse leveraged ETF SQQQ’s objective is to provide investors three times the return of the inverse performance of Nasdaq 100 on the daily basis before fees and expenses.
3. Leveraged ETF UPRO: Proshares leveraged ETF UPRO which tracks Standards&Poors (S&P 500) 100 has made over 100% market return during the last five years including this market decline.
Leveraged ETF UPRO is perfect for investors with high-risk tolerance during periods of low market volatility. A small portion of the investment portfolio should be allocated to the UPRO ETF as the best way to amplify returns when investors are anticipating a new bull market.
Leveraged ETF UPRO’s objective is to provide investors the three times the return of the performance of the S&P 500 on the daily basis before fees and expenses.
UPRO ETF is exposed to major sectors of the equity market.
4. Inverse Leveraged Bond ETF TBT: Proshares leveraged ETF TBT which tracks ICE U.S. Treasury 20+ Year Bond Index has made over 60% market return this year despite all equity markets being done for the year.
Leveraged ETF TBT is perfect for investors as a hedge against a rising rate environment.
ProShares UltraShort 20+ Year ETF can help to reduce the risk of too much exposure to the equity market and rising rates.
The market will decline during periods of high inflation. Bonds also will perform badly during periods of rising rates.
Leveraged ETF TBT’s objective is to provide investors double the return of the inverse performance of the ICE U.S. Treasury 20+ Year Bond Index on a daily basis before fees and expenses.
The goal of the ProShares UltraShort 20+ Year ETF is to profit from a decline of the ICE U.S. Treasury 20+ Year Bond Index.
The funds track two times the inverse daily performance of the ICE U.S. Treasury 20+ Year Bond Index before fees and expenses.
Leveraged Funds TBT Exposure
- ICE 20+ YEAR U.S. TREASURY INDEX SWAP GOLDMAN SACHS INTERNATIONAL
- ICE 20+ YEAR U.S. TREASURY INDEX SWAP SOCIETE GENERALE
- ICE 20+ YEAR U.S. TREASURY INDEX SWAP BANK OF AMERICA NA
- ICE 20+ YEAR U.S. TREASURY INDEX SWAP CITIBANK NA
- US LONG BOND(CBT) BOND 21/SEP/2022 USU2 COMDTY
5. Leveraged ETF QLD: Proshares leveraged ETF QLD which tracks Nasdaq 100 has made over 200% market return during the last five years.
Leveraged ETF TQQQ’s objective is to provide investors a double return of the performance of Nasdaq 100 on the daily basis before fees and expenses.
6. Leveraged ETF TECL: Direxion Daily Technology Bull 3X Shares TECL which tracks the investment results of the Technology Select Sector Index has made over 200% market return during the last five years.
Leveraged ETF TECL provides investors a possibility to magnify gains or losses to their investment portfolio exposure to the technology sector.
Leveraged ETF TCL’s objective is to provide investors triple the return of the performance of the Technology Sector Index on a daily basis before fees and expenses.
INDEX TOP TEN HOLDINGS
- Apple 24.55%
- Microsoft 22.43%
- Nvidia 4.13%
- Visa Incorporation 3.81%
- Mastercard 3.18%
- Broadcom Limited 2.33%
- Cisco 2.08%
- Accenture Plc-A 2.07%
- Adobe 2.03%
- Salesforce.com 1.93%
Source: Direxion
7. Leveraged ETF SOXL: Direxion Daily Semiconductor Bull 3X Shares which tracks ICE Semiconductor Index has made over 200% market return during the last five years.
Leveraged ETF SOXL’s objective is to provide investors the triple return of the performance of the ICE Semiconductor Index on a daily basis before fees and expenses.
INDEX TOP TEN HOLDINGS
- Intel 8.20%
- Broadcom Limited 8.16%
- Nvidia 7.91%
- Texas Instruments 6.62%
- Advanced Micro Devices 5.72%
- Qualcomm 4.34%
- Kla Corporation 4.26%
- Analog Devices 4.23%
- Lam Research 3.99%
- Microchip Technology 3.89%
Source: Direxion
Leveraged ETFs Investors risk exposure
Leverage ETFs are invested using financial derivatives therefore investors are exposed to greater risk than investing directly into the underlying sector ETF.
Ticket Beta (5 Year Monthly)
- TQQQ 3.50
- SQQQ -2.40
- UPRO 3.15
- TBT -4.88
- QLD 2.27
- TECL 3.54
- SOXL 3.78
The beta of the underlying security is a measurement of the level of systematic risk and volatility relative to a benchmark. In the nutshell, the higher the better is, the higher the risk and volatility.
For example, the investment objective of an inverse leveraged ETF is to provide investors twice the inverse return of a 20-year treasury bond. iShares 20+ Year Treasury Bond ETF (TLT) is down 25% while inverse leveraged ETF TBT is up 64% for the year as of September 2, 2022.
Volatility and decay can play a big role in the performance of leveraged ETFs if invested for at least one year.
Leveraged ETF strategies for growing a portfolio quickly
1. Select a leveraged ETF with a decent trading volume
2. Dollar Cost average of a leveraged ETF investment
3. Schedule consistently an investment into leveraged ETF
4. Diversify by using a few different leveraged ETFs in your portfolio
5. Evaluate periodically leveraged ETFs portfolio at least once each year and take profit if the market is trending down
6. Consider adding inverse ETF to a leveraged ETF portfolio during a period of extreme volatility
Key Takeaways from investing in leveraged ETFs
1. Leveraged ETFs investments are very risky, especially during periods of high volatility. Investors can lose their entire capital if the underlying indexes happen to fall at least 33%.
2. Investors using leveraged ETFs in their portfolio must learn to take a profit at least once a year.
3. Leveraging ETF is a very useful portfolio management tool for growing a small account if used strategically.
4. Leverage ETF works better during periods of low market volatility.
5. Leveraged ETF uses financial derivatives therefore, its expenses and fees are often significantly higher than the ETFs tracking the underlying indexes
6. Stay diversified. Don’t put all your eggs in one basket. Leveraged ETFs should be used in the context of portfolio diversification.
7. Dollar Cost averages your investment monthly. Using a lump sum investment can be detrimental to your portfolio during downtrends.
8. Stay small. Don’t invest the biggest portion of your capital into leveraged ETFs for long-term
9. Without risk, there is no reward. If you are a long-term investor with at least a 10 years time horizon, adding a small portion of your investment into leveraged ETFs strategically is not a bad idea at all.
10. The Fed will eventually stop raising rates when inflation is under control. Hopefully, we are not in recession.
