Leveraged ETF DDM review and strategies
Leveraged ETFs can be used strategically to grow a portfolio. They involve a lot of risks and are not everyone.
Equities around the globe are falling due to the Central Banks’ aggressive stance against inflation.
Leveraged Ultra Dow30 (DDM) tracks the return of the Dow Jones Average on a daily basis.
Dow Jones Average is down so far in 2022. It is hard to predict 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 significant role in hedging or speculation, especially during periods of market volatility.
Leveraged ETFs have produced excellent returns following the 2008 financial-economic crisis.
Proshares leveraged ETF DDM is often correlated with the total US equities market.
Leveraged Ultra Dow30 (DDM) goals
The goal of the Proshares leveraged ETF DDM is to outperform the Dow Jones Average by producing two times the return of the index
It is important to have a strategy in place in order to avoid losses being greater than the losses of the underlying asset for a given time horizon.
Dow Jones Average index
The index is allocated to 30 stocks across several sectors
Apple Goldman Sachs Chevron Walgreen Boeing
IBM JP Morgan Chase Dow Johnson & Johnsons Nike
Salesforce Visa Caterpillar Merck Verizon
Microsoft Walmart 3M UnitedHealth Travelers
Cisco American Express Home Depot Amgen Disney
Intel Travelers Honeywell Procter & Gamble Coca-Cola
DIA ETF is one of the popular ETFs that mimics the performance of the index. The fund is managed by State Street Global Advisors(SSGA).
DIA ETF Sector Allocation
Health Care 21.13%
Financials 19.52%
Consumer Services 16.88%
Technology 16.84%
Industrials 13.90%
Consumer Goods 6.38%
Oil & Gas 3.28%
Basic Materials 1.07%
Telecommunications 0.93%
The fund’s dividend yield is around 2%
DIA ETF Performance against SPY ETF (S&P500)
DIA ETF tends to perform better than SP500 during market downtrends. Past performance is not always indicative of future results.
SP500 is heavily weighted towards technology which tends to underperform during periods of rising rates.
One thing is certain, equities go up more than go down. The key is to strategize about protecting your portfolio during downtrends.
Popular leveraged and inverse ETFs
ProShares UltraPro Nasdaq-100 Bull 3x leveraged ETF- TQQQ ETF
ProShares UltraPro Nasdaq-100 Bear 3x inverse ETF-SQQQ ETF
Direxion Daily Semiconductor Bull 3x leveraged ETF- SOXL ETF
Direxion Daily Semiconductor Bear 3x inverse ETF- SOXS ETF
Direxion Daily Biotech Bull 3x leveraged ETF- LABU ETF
Direxion Daily Biotech Bear 3x inverse ETF -LABD ETF
Direxion Small Cap Bull 3x leveraged ETF-TNA ETF
Direxion Small Cap Bear 3x inverse ETF-TZA ETF
Direxion S&P 500 Bull 3x leveraged ETF-SPXL ETF
Direxion S&P 500 Bear 3x inverse ETF-SPXU ETF
Proshares Ultra QQQ (Nasdaq-100) Bull 2x leveraged ETF-QLD ETF
Proshares UltraShort QQQ (Nasdaq-100) Bear 2x inverse ETF-QID ETF
Proshares Ultra S&P 500 Bull 2x leveraged ETF-SSO ETF
Proshares UltraShort S&P 500 Bear 2x inverse ETF-SDS ETF
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 in 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
Leveraged ETF DDM Investment during rising rates
If you invest constantly at the beginning of each month $100 starting January 2022 in the Proshares leveraged ETF DDM, you will gain close to 3% this year as of August 15, 2022, while all the broad-based indexes are significantly down.
If you invest constantly at the beginning of each month $100 starting in January 2021 in the Proshares leveraged ETF DDM, you will gain close to 16% at the end of the year 2021 while all the broad-based indexes are significantly higher.
If you invest constantly at the beginning of each month $100 starting in January 2020 in the Proshares leveraged ETF DDM, you will gain close to 30% and outperform the index.
Investment Portfolio Risk Management with DDM and TBT
We know the risks that pose these leveraged ETFs.They can be useful for a long-term portfolio during periods of low market volatility and economic expansion.
They can also be disastrous during periods of inflation and rising rates.
The market will decline during periods of high inflation. Bonds also will perform badly during periods of rising rates.
Therefore, one strategy is to deploy an UltraShort 20+ Year Treasury (TBT) leveraged ETF to hedge our portfolio during a rising rate environment.
How can investors hedge a portfolio with inverse ETF TBT?
Equities have a negative correlation with treasury bonds and rising rates.
Treasury bonds don’t do well during a rising rates environment therefore the inverse bond ETF will outperform the market during that period.
The hedge here is to add the inverse bond ETF to reduce equities portfolio risk.
The allocation percentage to the inverse bond ETF TBT will depend on our risk tolerance. An example of allocation will be 60% to DDM ETF to 40% for leveraged ETF TBT.
Leveraged Funds TBT Core Holdings
1. ICE 20+ YEAR U.S. TREASURY INDEX SWAP GOLDMAN SACHS INTERNATIONAL
2. ICE 20+ YEAR U.S. TREASURY INDEX SWAP SOCIETE GENERALE
3. ICE 20+ YEAR U.S. TREASURY INDEX SWAP BANK OF AMERICA NA
4. ICE 20+ YEAR U.S. TREASURY INDEX SWAP CITIBANK NA
5. US LONG BOND(CBT) BOND 21/SEP/2022 USU2 COMMODITY
Other Bond ETFs are:
TLT iShares 20+ Year Treasury Bond ETF
TBT ProShares UltraShort 20+ Year Treasury
TMV Direxion Daily 20+ Year Treasury Bear 3x Shares
TBF ProShares Short 20+ Year Treasury
TMF Direxion Daily 20+ Year Treasury Bull 3X Shares
TTT ProShares UltraPro Short 20+ Year Treasury
UBT ProShares Ultra 20+ Year Treasury
Inverse Leveraged Bond ETF TBT performance
If you invest constantly at the beginning of each month $100 starting January 2022 in the UltraShort 20+ Year Treasury (TBT) leveraged ETF, you will gain close to 12% this year as of August 15, 2022, while all the broad-based indexes are significantly down.
If you invest constantly at the beginning of each month $100 starting January 2021 in the UltraShort 20+ Year Treasury (TBT) leveraged ETF, you will lose close to 8% at the end of the year 2021 while all the broad-based indexes are significantly higher.
If you invest constantly at the beginning of each month $100 starting in January 2020 in the UltraShort 20+ Year Treasury (TBT) leveraged ETF, you will lose close to 1% at the end of the year 2020 while all the broad-based indexes are significantly higher.
What will happen to the leveraged ETF TBT when the underlying index ICE U.S. Treasury 20+ Year Bond Index is up at least 50% in one day?
The objective of the leveraged ETF TBT is to outperform double inversely the return of the ICE U.S. Treasury 20+ Year Bond Index therefore you can technically lose all your money.
In 2020, the price of US oil West Texas Intermediate WTI turned negative for the first time in US history.
Leveraged ETFs Description Beta (5Y Monthly)
Proshares leveraged ETF DDM 1.90
ProShares UltraShort 20+ Year Treasury TBT -4.88
What if a portfolio is built on the basis of 60% equity and 40% bond using leveraged ETFs above?
Suppose that you invest $100 each month into this portfolio ($60 in DDM and $40 in TBT) starting January 2022.You will significantly outperform the indexes.
Your portfolio return as of August 15, 2022, will be negatively impacted if you invest a lump sum for example $1000 at the beginning of the year in addition to the $100 monthly amount.
Ticker No Lump Sum With Lump Sum
DDM 3% 1%
TBT 12% 27%
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. Leveraged 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, their 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 the 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.
