Leveraged ETFs: High Rewards, High Risks
A specialized type of ETF is designed to provide a multiple (typically 2x or 3x) of the daily return of its underlying index or stock. There are also inverse leveraged ETFs, which aim to deliver the opposite of the daily return.
If the S&P 500 $S&P 500(.SPX)$ goes up 1% in a single day, a 3x leveraged S&P 500 ETF (like $ProShares UltraPro S&P 500(UPRO)$ ) aims to go up 3%. Conversely, if the S&P 500 falls 1%, the ETF will fall 3%. $ProShares UltraPro Short QQQ(SQQQ)$ is a leveraged-inverse ETF for $Invesco QQQ(QQQ)$ , which gains 3% if the $Invesco QQQ(QQQ)$ falls 1%, same as $ProShares UltraPro Short Russell 2000(SRTY)$ for $iShares Russell 2000 ETF(IWM)$ , or $ProShares UltraPro Short Dow30(SDOW)$ for $SPDR Dow Jones Industrial Average ETF Trust(DIA)$ .
This instruments may look attractive when there is a clear trend, but when the leverage is against the trend (like owning SQQQ when the market is in a solid uptrend) the losses are increased twice or three times depending on the ETF considered.
Beyond broad market indices, traders can also use leveraged ETFs to make magnified bets on individual stocks. For popular names like $Tesla Motors(TSLA)$ , an ETF such as $Direxion Daily TSLA Bull 2X Shares(TSLL)$ aims to deliver twice the stock's daily return. Conversely, an inverse ETF like $Tradr 2X Short TSLA Daily ETF(TSLQ)$ is designed to provide twice the opposite of Tesla's daily performance.
Similarly, for $NVIDIA(NVDA)$ , there are instruments like NVD3 offering 3x daily leverage for bullish bets, and inverse products like NVD, which seeks to gain 2% on a day when NVDA stock loses 1%.
Ownership: You own shares of the fund.
Leverage: Built-in and significant (2x or 3x).
Risk: Extremely High. Because these funds reset their leverage daily, their long-term performance can "decay," especially in volatile or sideways markets. A week of up-and-down price action can result in losses for the leveraged ETF even if the underlying index is flat.
Best For: Sophisticated, short-term traders making a high-conviction bet on a specific direction over a very short period. They are not suitable for long-term, buy-and-hold investing.
The chart below compares the performance of the S&P 500 ETF (SPY) with its 2x leveraged (SSO) and 3x leveraged (UPRO) counterparts.
While leveraged ETFs look fantastic in bull markets, they can be difficult to endure during drawdowns, leading to severe losses. For this reason, a trader must be technically skilled and have a firm grasp of risk management.
This is why this publication provides support and resistance levels every Friday for the primary long and inverse ETFs covering SPY (UPRO/SPXS), QQQ (TQQQ/SQQQ), IWM (URTY/SRTY), and DIA (UDOW/SDOW). Click here for access.
When a technical setup presents a high probability for a directional move, a skilled trader can use these instruments effectively by carefully managing their risk.
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