While many investors try to match the market by purchasing broadly-based index funds, leveraged exchange-traded funds (ETFs) employ derivatives to magnify the gains or losses of an underlying index. Find out what you should be looking for in a leveraged ETF and which leveraged funds are now your best bet.
You can’t beat the market if you join the market, and so goes the old investment adage. This proverb refers to the fact that if you put all of your money into index funds and exchange-traded funds (ETFs), your portfolio would look very similar to the stock market as a whole, making it very difficult, if not impossible, to achieve better returns than the market as a whole.
However, there is a way to potentially outperform the market while purchasing ETFs, so it’s not entirely true.
Leveraged ETFs multiply the potential returns of their holdings through the use of derivatives. A triple-leveraged (3x) S&P 500 ETF, by way of illustration, would leverage derivatives in order to generate three times the gains or losses generated by the S&P 500 market index.
How to Choose a Leveraged ETF
Investing in leveraged ETFs is risky since losses are magnified if the underlying assets decrease. Traders are still getting engaged, though. Since upward progress is also amplified, the answer is yes.
These funds, like any other form of capital, have varying degrees of quality and safety. It’s crucial to conduct your homework before investing in a mutual fund because expense ratios, returns, and holdings can vary greatly from one fund to the next.
When comparing leveraged funds, it is crucial to take into account the following:
Leveraged exchange-traded funds (ETFs) typically have higher costs than passively managed ETFs because of the fees involved with derivatives and active trading.
Still, investment-grade funds can charge whatever they like, so fees will vary widely depending on the specific fund. Hence, before putting money down, you should check out how different funds fare in terms of their expenditure ratios.
The whole objective of investing in leveraged funds is to acquire access to assets that can generate returns in excess of the market average. While some funds in this space have proven track records of impressive returns, others do not.
Returns during the past year, three years, and five years might give you a good idea of how profitable a given fund has been in the past.
Exchange-traded funds are only as liquid as the market will allow. If you decide to sell your holdings, you’ll have the least trouble doing so from the most liquid of your funds: the ones that are widely held.
A quick exit may be difficult if you have invested in an unpopular fund and then wish to leave. For the highest returns, choose a leveraged fund with high assets under management (AUM) and a big number of investors. Commonly used funds include those listed here.
All derivative investment funds are only as good as the underlying assets in which they invest. In leveraged funds, when profits are multiplied, this is especially the case. Therefore, before putting your hard-earned money into the fund, it is prudent to research the underlying assets.
Top Leveraged ETFs to Purchase
Using the aforementioned criteria, the following are some of the top leveraged ETFs available today:
1. Shares of Direxion Daily Financial Bull (FAS)
In the years since its inception in 1997, Direxion has become a trusted provider of investment management services, gathering over $24 billion in assets under its stewardship.
You can trust that your money is safe in the company’s hands when you invest with them.
The fund’s goal was to provide investors with returns three times higher than those seen in the U.S. financial services industry.
The portfolio invests in the largest U.S. financial services companies by following the Russell 1000 Financial Services Index. The fund’s primary focus is on the financial sector, although it has a wide range of holdings within that sector, including mortgage firms, banks, credit card companies, and more.
Here are some of the most important facts about the fund:
- The annual expense ratio for this fund is 0.99% of investor assets. This is in line with what you would expect to spend when investing in an active, leveraged ETF, however, it is a higher cost structure than the average ETF, which costs roughly 0.44% according to The Wall Street Journal.
- Return on investment. The fund’s return on investment has been nothing short of spectacular. Gains for shareholders have averaged over 250% over the past year. Similarly outstanding are the returns investors have received over the past three and five years, at 21.25% and 34.70%, respectively.
- Total AUM. The FAS fund is worth more than $3 billion in today’s market. That’s extremely high compared to other leveraged ETFs, and it suggests that this investment vehicle is highly sought after by investors.
- As was noted earlier, the fund’s primary objective is to provide returns three times higher than those of the U.S. banking industry. To do this, it primarily utilizes the following investments; Russell 1000 Financial Index Swaps; Goldman Sachs FX Treasury Instruments Fund (FTIXX); Berkshire Hathaway Class B Shares (BRK.B); Dreyfus Government Securities Cash Management Administrative Mutual Fund (DAPXX); and JP Morgan Chase (JPM).
The fund’s price is reasonable, and its returns are outstanding, as can be shown. On the other hand, its immense popularity ensures that it is liquid. This fund is a good option for those who want to invest in the financial services industry in the United States but want to reduce their risk by investing in a diverse portfolio.
2. ProShares UltraPro QQQ (TQQQ)
Like many other companies of the last two decades, ProShares’ popularity skyrocketed after its founding in 1997. The fund manager is now the market leader in leveraged exchange-traded funds (ETFs), with over $53 billion in assets under management.
The fund’s objective is to generate returns that are three times higher than the Nasdaq 100. Considering the Nasdaq’s emphasis on technology, the TQQQ is an excellent vehicle for diversifying into a wide range of tech-related investments, including semiconductors, AI, and biotech.
The most important data are as follows:
- Cost. In order to put money into the fund, investors must pay a yearly fee of 0.95 percent of their total value. Typical of leveraged exchange-traded funds, this is more expensive than the usual ETF but on par with what you’d pay for an actively managed fund. The fund’s results also appear to be worth the high price tag.
- Performance. Over the past year, investors have seen returns of more than 150% thanks to the fund’s stellar performance. Investment returns during the past three years were 62.59%, and over the past five years, they were 72.54%.
- AUM means assets under administration. With over $12 billion in assets under management, TQQQ is one of the largest leveraged funds available.
- Holdings. The fund’s investments are heavily weighted in technology in order to generate returns three times higher than the Nasdaq’s top 100 businesses. Most of the fund’s top six positions are swaps on the Nasdaq 100 index from various issuers. There are significant holdings in Apple (AAPL), Microsoft (MSFT), and Amazon in the portfolio as well (AMZN).
This fund’s substantial emphasis on technology makes it attractive to those seeking outperformance relative to the market through investments in biotechnology and pharmaceuticals. The fund has a competitive fee structure and a history of outstanding performance.
3. Direxion Daily Technology Bull ETF 3X Shares (TECL)
Due to Direxion’s prominence as a provider of leveraged ETFs, the company appears multiple times here. Those interested in the technology industry may like to consider the Technology Bull 3X Shares Exchange Traded Fund.
The fund’s goal was to deliver returns three times those of an index that follows companies operating in subsectors of the technology industry (Technology Select Sector Index).
The fund has a significant allocation to information technology (IT) sectors including but not limited to computer hardware, software, telecommunications services, semiconductors, and IT services.
The most important data are as follows:
- Cost. Participation in the TECL fund will cost investors 1.01% annually in fees. The fund’s expenditures are typical for actively managed funds, albeit they are higher than the lowest fee structure on this list.
- Performance. The annualized return for investors is at a stunning 140%. Returns on the fund were 61.64% over the past three years and 72.98% over the past five years.
- AUM means assets under administration. Investors have put more than $2.5 billion into the fund as of this writing. Not the biggest fund available, but strong interest means you won’t have to worry about running out of money.
- Holdings. The fund has a skewed focus on the tech sector. Investments in Technology Select Sector Index Swaps, Apple (AAPL), Microsoft (MSFT), Dreyfus Government Securities Cash Management Administrative Mutual Fund (DAPXX), and Goldman Sachs FX Treasury Instruments Fund are among the fund’s largest holdings (FTIXX).
This fund’s considerable emphasis on the tech industry makes it a good choice for risk-takers who are interested in the tech industry and want to potentially reap large rewards.
4. The ProShares UltraPro S&P 500 Fund (UPRO)
If you invest in the ProShares UltraPro S&P500 Fund, you can trust that your money is being managed by a reputable and experienced firm.
The fund’s focus is, as one might guess from the name, on the S&P 500 market index, one of the most comprehensive measures of the U.S. market.
The fund’s objective is to achieve returns three times higher than the S&P 500 by using leverage. The underlying index is extremely diversified, with assets that cover virtually every market segment in the United States.
A few key numbers are as follows:
- Cost. The fund’s expense ratio is 0.93%, making it more expensive than the typical exchange-traded fund. However, the cost is quite cheap compared to other leveraged options, allowing you to keep a larger portion of your profits.
- Performance. Returns for the past year have been above 155%, with returns of 34.76 and 38.96% for the past three and five years.
- Managed Assets. More than $2.5 billion dollars have been invested into the fund since it began.
- Holdings. The product provides diversified exposure to the whole U.S. market as represented by the S&P 500, the underlying index. No single stock accounts for a disproportionate part of the fund’s value; instead, S&P 500 index swaps make up the bulk of the portfolio.
Given the fund’s low expense ratio and consistent performance, it would be foolish to write it off as a potential investment. Additionally, the fund’s high level of diversification makes it an excellent choice for those who wish to avoid having too much of their portfolio invested in any one particular market or industry.
5. ProShares Ultra S&P500 Fund (SSO)
This ProShares leveraged fund tracks the S&P 500 index broadly, as the name implies. Investors who want to earn better than average returns from the market often choose this strategy, which aims to achieve double the returns of the index but with a lower risk profile.
Although this would diminish potential gains on the upside, it would significantly mitigate the chance of a fall.
A few key numbers are as follows:
- Cost. The fund’s expense ratio is 0.91% per year, which is greater than the expense ratio of the typical passively managed ETF but lower than the average for leveraged options.
- Performance. Compared to the aforementioned funds, this one has historically had lower returns, but far smaller drawdowns, because it is a 2x fund rather than a 3x fund. Investors should be pleased with the fund’s performance as it has returned more than 91% annually, 29.55% annually, and 29.82% annually over the past three and five years.
- AUM means assets under administration. Fund popularity is not an issue because the fund manages over $4 billion in assets, so you can easily find a buyer for your holdings whenever you’re ready.
- Holdings. Similar to the UPRO fund, the vast majority of the holdings in this fund are swaps of the S&P 500 index and not individual stocks.
For those seeking leverage but wary of the severe drawdown risk associated with 3x leveraged funds, the SSO fund is a fantastic alternative.
The fund has provided significant returns for its investors while also being relatively inexpensive compared to other leveraged options and boasting a portfolio that is sufficiently diversified to hedge against losses in any one area of the domestic economy.
6. The Direxion Small Cap Bull 3X Shares ETF (TNA)
Due to its leveraged exposure to small-cap equities, Direxion’s Small Cap Bull 3X ETF is a favorite among investors. Historically, smaller companies have outperformed their large-cap counterparts over the long haul, giving them a perfect option for investors seeking to outperform the market.
Using leverage increases the possibility of outsized profits. In other words, the fund’s goal is to produce returns that are three times higher than the Russell 2000. As a result, capital can be deployed more efficiently toward domestic small-cap equities.
The most important data are as follows:
- Cost. This fund has an annual expense ratio of 1.11%, which is rather high compared to the others in this table. However, the extra cost may be justified by its superior performance, especially if a preference for tiny stocks and 3x leverage are implemented.
- Performance. Three years in, the fund has gained 6.33 percent, which isn’t great but is better than the one and five years in which it has lost money. Currently, the return on investment for the past five years is 25.71%, and it has been over 25% annually for the past year.
- AUM means assets under administration. In the years since its creation, the TNA fund has drawn over $1.7 billion from investors. It’s not the biggest fund available, but it’s widely held so there shouldn’t be any worries about the availability of funds.
- Holdings. The portfolio of the fund consists of only six different securities. Investment options include the iShares Russell 2000 Exchange Traded Fund (IWM), the Russell 2000 Index Small Cap Swaps, the Dreyfus Government Securities Cash Management Administrative Mutual Fund (DAPXX), the Goldman Sachs FX Treasury Instruments Fund (FTIXX), and the Goldman Sachs Square Treasury Instruments Fund.
While the fund’s costs are greater than average, its performance over the past year more than makes up for it. This, together with the fund’s skewed emphasis on tiny, high-potential businesses, makes the TNA fund difficult to overlook.
7. Shares of Direxion Daily S&P500 Bull (SPXL)
The SPXLfund, another offering from Direxion, aims to achieve returns three times those of the S&P 500 index. Investors seeking leverage with strong sector diversification across domestic equities may find the product appealing since it focuses on the S&P 500 as a whole.
A few key numbers are as follows:
- Cost. The fund has an annual fee of 1.01% of your total investment. Although it is not the most inexpensive option, its returns in the past have been quite good.
- Performance. Returns for the past year have exceeded 155%, with returns of 34.71% and 38.78% for the past three and five years, respectively.
- AUM means assets under administration. Investors have committed around $2.4 billion to the fund so far.
- Holdings. Although the fund invests in only five different assets, it offers diversified, leveraged exposure to the entire U.S. market. To name just a few the iShares Core S&P 500 ETF (IVV), the Dreyfus Government Securities Cash Management Administrative Mutual Fund (DAPXX), the S&P 500 Index Swaps, the Goldman Sachs FX Treasury Instruments Fund (FTIXX), and the Goldman Sachs Square Treasury Instruments Fund.
Overall, this fund is an excellent choice for those who wish to take advantage of leverage in the market while also gaining broad exposure to a variety of local industries and market capitalizations. The fund is highly competitive because of its low expenses and high returns.
8. ProShares Ultra 7–10 Year Treasury Fund (UST)
Up to this point, all of the listed funds have dealt with the issue of leveraging equity exposure. However, even a leveraged portfolio needs to have certain fixed-income securities to be considered diversified.
The ProShares Ultra 7-10 Year Treasury Fund is designed for just such an investment horizon. Having a focus on intermediate-term Treasury debt securities with maturities between seven and ten years, the fund aims to provide returns that are double those of such instruments.
The most important data are as follows:
- Cost. Like other actively managed funds, the 0.95% annual fee attached to the UST fund is standard.
- Performance. Due to the ultra-low interest rate environment limiting bond returns, the fund’s performance hasn’t been great as of late. Investments have declined by 9.38% during the past year. The fund’s returns have been 9.35% during the past three years and 2.21% over the past five years, nevertheless. Although the fund’s returns are lower than those of equity-focused leveraged funds, it does help to reduce drawdown risk by providing stability within a leveraged portfolio.
- The Value of the Assets That Is Being Managed. The UST fund’s $18.79M in assets under management means it is not as liquid as some of the others on this table. However, investors seeking leveraged funds are not often worried about safety, therefore leveraged bond funds are not typically a popular alternative. But among these types of funds, UST is quite common.
- Holdings. There are only three holdings in the fund, and they’re all in the form of Treasury debt instruments. In this category are U.S. Treasury Notes and two types of U.S. Treasury index swaps.
Overall, a leveraged bond fund is not something most investors would want to get involved with. On the other hand, if you’re interested in reducing your portfolio’s overall exposure to risk, leverage is a fantastic tool to have at your disposal.
Despite UST’s modest returns over the previous few years due to the low-interest rate environment, the fund is still among the best of its kind among leveraged bond funds.
9. The Direxion Daily 20+ Year Treasury Bull 3X ETF (TMF)
Bonds with maturities of 20 years or more from the United States Treasury are the primary holdings of this portfolio. The goal of the fund was to generate returns three times as high as those of the typical 20-year Treasury bond.
Low-interest rates have been bad for TMF and other leveraged bond funds over the past few years. However, it is fantastic protection against the danger of a drawn-down leveraged portfolio.
- Cost. The fund is one of the more pricey options here, with an annual expense ratio of 1.06% of your initial investment. Although it is not the best-performing leveraged bond fund, it is one of the better ones.
- Performance. As much as it hurts, investors in this fund have had to endure a prolonged period of historically low-interest rates. It is anticipated that the fund’s returns will increase when interest rates rise. Still, shareholders have lost 33.56% in the last 12 months. Over the past five years, the fund has lost 0.38% of its value while generating gains of 12.53% over the past three.
- AUM means assets under administration. TMF is a widely-chosen option among leveraged bond funds. Investors have put over $286 million into it.
- Holdings. The fund is easy to understand because it just holds four different types of investments. These include the iShares 20+ Year Treasury Bond ETF (TLT), the Goldman Sachs FX Treasury Instruments Fund (FTIXX), the Dreyfus Government Securities Cash Management Administrative Mutual Fund (DAPXX), and the iShares 20+ Year Treasury Bond ETF Swaps.
Although returns have been lackluster over the past few years, reducing overall portfolio risk by investing in fixed-income instruments can be a useful strategy, especially when managing a leveraged portfolio. As a viable alternative, the TMF is a great choice for reaching that goal.
10. The Direxion Daily Retail Bull 3X Shares ETF (RETL)
In order to have retail exposure in a leveraged portfolio, the RETL fund was created. The fund’s objective is to provide returns three times those of the S&P Retail Select Industry Index, which tracks the performance of the retail subsector of the S&P 500 index.
The most important data are as follows:
- Cost. There is an annual fee of 1% for investors to take part in the fund. The 1% price may not be the cheapest option, but the impressive results more than justify the investment.
- Performance. In the past year, this fund has returned about 730% to its backers. Three-year returns were 43.78%, while five-year returns were 26.57%.
- AUM means assets under administration. The RETL fund is not the most well-liked option here, having only attracted around $151 million from investors thus far. However, the fund sees sufficient volume to not worry about running out of money.
- Holdings. To achieve its goal of tripling its returns, the fund is laser-focused on the retail industry. The fund’s top five holdings are as follows: S&P Retail Select Industry Index Swaps; Dreyfus Government Securities Cash Management Administrative Mutual Fund (DAPXX); Goldman Sachs FX Treasury Instruments Fund (FTIXX); Goldman Sachs FS Government Institutional Fund (FGTXX); and Etsy Inc. (ETSY).
Watch Your Use of Leverage
Whether it’s on exchange-traded funds (ETFs) or individual stocks, the greater profit potential that leverage offers often tempts inexperienced investors to leap in head first. Yes, the potential for higher earnings is enormous, but the downside can be extremely distressing.
A fund’s ability to magnify the returns of an underlying benchmark holds true whether those returns are positive or negative. Despite the fact that stock prices have been rising for the better part of the past few years and producing excellent profits, bull markets do not persist forever. When market conditions deteriorate, the effects of losses on leveraged investments are amplified.
Let’s imagine you decide to put $1,000 into a triple-leveraged S&P 500 ETF. If the index increases by 1% in a single trading day, your daily profit will be roughly $30. In contrast, if the index dropped by 1% during the trading session, you would lose around $30, starting the next day with $970.
In a frighteningly short amount of time, your savings can be depleted by a succession of bad days. These investments carry a high degree of danger and should only be attempted by people who have substantial stock market expertise. Avoid leverage like the plague if you’re just starting off.
Because their returns can significantly surpass those of the market as a whole, leveraged funds have grown increasingly popular. These funds are suitable for investors with a high-risk tolerance, but it’s crucial to remember that they experience substantial short-term volatility.
You should study up on the fund industry as you would any other investment opportunity. In order to get the best-leveraged fund for your needs, you need to look into its cost, past performance, holdings, and popularity.