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Amid a booming ETF industry and skyrocketing markets, the appeal for leveraged ETFs has been rising rapidly though these products occupy a small slice of the ETF space.
Leveraged ETFs provide multiple exposure (2X or 3X) to the daily performance of the underlying index. These funds employ various investment strategies such as use of swaps, futures contracts and other derivative instruments to accomplish their objectives. Due to their compounding effect, investors can enjoy higher returns in a very short period of time, provided the trend remains a friend (see: all Leveraged Equity ETFs here).
Since most of these ETFs seek to attain their goals on a daily basis, their performance could vary significantly from the performance of their underlying index or benchmark over a longer period when compared to a shorter period (such as, weeks, months or years) due to their compounding effect. This phenomenon can be explained with an example below.
Imagine that an investor buys a leveraged ETF for $100 that has two times (2X) exposure to the underlying index of say 10,000. If the index goes up by 1% to 10,100 on day 1, then the market price of the ETF moves up by 2% to $102 on the same day. Again, when the index goes up by another 1% to 10,201 on day 2, the ETF value goes up by another 2% to $104.04. Over the last two days, the index is up 2.01% while the ETF is up 4.04% (approximately two times as stated by the fund objective). Thus, the performance of the fund and index can vary if we take longer periods for consideration.
Investors should also note that leveraged ETFs involve a great deal of risk when compared to the traditional funds. They are often more costly and can be less tax-efficient, as they can see capital gains through the use of swaps and other derivative instruments.
How to Play?
The space remains incredibly popular for investors looking to mint money in a very short period of time, provided the trend remains a friend. For these traders, there are close to 175 leveraged funds in the space targeting different asset classes.
In this article, we take a look at the 10 biggest and most-popular ETFs for those investors who are new to the leveraged technique. While these products might not necessarily be the best choices in their respective markets, they have become popular vehicles in this sector. Here’s a quick guide:
Leveraged Factor: 3x Benchmark Index: NASDAQ-100 Index
This is the most-popular and liquid ETF in the leveraged space with AUM of $11.1 billion and an average daily volume of 36.7 million shares a day. The fund seeks to deliver three times the return of the daily performance of the NASDAQ-100 Index, charging investors 0.95% in expense ratio (read: Leveraged ETFs That Gained Double Digits in April).
Leveraged Factor: 2x Benchmark Index: NASDAQ-100 Index
This fund also tracks the NASDAQ-100 Index but offers twice the returns of the daily performance with the same expense ratio of TQQQ. It has managed AUM of $4 billion and sees 1.6 million in average daily volume.
Leveraged Factor: 2x Benchmark Index: S&P 500 Index
This product provides two times exposure to the S&P 500 Index, charging 91 bps in fees and expenses. It has been able to manage $3.9 billion in its asset base with daily trading volume of around 2.1 million shares (read: 5 Top Stocks at the Forefront of S&P 500 ETF Rally This Year).
Leveraged Factor: 3x Benchmark Index: PHLX Semiconductor Sector Index
This ETF targets the semiconductor corner of the technology sector with three times leveraged exposure to the PHLX Semiconductor Sector Index. It has amassed about $3.9 billion in its asset base while charging 94 bps in fees per year. Volume is good as it exchanges 19.1 million shares per day, on average.
Leveraged Factor: 3x Benchmark Index: Russell 1000 Financial Services Index
This ETF seeks to make a large profit from the bullish trend in the financial sector. It provides three times exposure to the performance of the Russell 1000 Financial Services Index. The fund has amassed nearly $3.4 billion in its asset base while trading in volume of around 1.7 million shares. It charges 94 bps in annual fees (read: Q1 Earnings Effect: 5 Must-Watch ETF Charts).
Leveraged Factor: 3x Benchmark Index: S&P 500 Index
This product provides triple leveraged play to the S&P 500 Index, charging 93 bps in fees and expenses. It has been able to manage $2.4 billion in its asset base with daily trading volume of around 4.1 million shares.
Leveraged Factor: 3x Benchmark Index: S&P 500 Index
Like UPRO, this fund also creates 3X long position in the S&P 500 Index with an expense ratio of 0.95%. It has AUM of $2.2 billion and trades in an average daily volume of nearly 6.3 million shares.
Leveraged Factor: 3x Benchmark Index: Technology Select Sector Index
This ETF targets the broad technology sector with three times exposure to the Technology Select Sector Index. It has amassed about $1.9 billion in its asset base and charges 95 bps in fees per year. Volume is good as it exchanges around 2 million shares a day, on average.
Direxion Daily Small Cap Bull 3x Shares (TNA - Free Report)
Leveraged Factor: 3x Benchmark Index: Russell 2000 Index
This product offers triple exposure to the small-cap space by tracking the Russell 2000 Index, charging 95 bps in fees and expenses. It has amassed $1.6 billion in its asset base and sees a solid volume of 7.7 million shares a day on average.
BMO REX MicroSectors FANG+ Index 3X Leveraged ETN (FNGU - Free Report)
Leveraged Factor: 3x Benchmark Index: NYSE FANG Index
This note seeks to offer three times leveraged exposure to the NYSE FANG Index, charging 95 bps in annual fees. The ETN has accumulated $1.3 billion in its asset base and trades in an average daily volume of 5.3 million shares.
Bottom Line
Investors should note that ProShares and Direxion have been the leaders in the leveraged ETF space with most of the popular products coming from these issuers. These ETFs are not confined to one asset class or a specific sector but are spread out across various corners of the world. With a bullish outlook, these funds could pile up abnormal returns in a shorter period of time.
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A Guide to 10 Most-Popular Leveraged ETFs
Amid a booming ETF industry and skyrocketing markets, the appeal for leveraged ETFs has been rising rapidly though these products occupy a small slice of the ETF space.
Leveraged ETFs provide multiple exposure (2X or 3X) to the daily performance of the underlying index. These funds employ various investment strategies such as use of swaps, futures contracts and other derivative instruments to accomplish their objectives. Due to their compounding effect, investors can enjoy higher returns in a very short period of time, provided the trend remains a friend (see: all Leveraged Equity ETFs here).
Since most of these ETFs seek to attain their goals on a daily basis, their performance could vary significantly from the performance of their underlying index or benchmark over a longer period when compared to a shorter period (such as, weeks, months or years) due to their compounding effect. This phenomenon can be explained with an example below.
Imagine that an investor buys a leveraged ETF for $100 that has two times (2X) exposure to the underlying index of say 10,000. If the index goes up by 1% to 10,100 on day 1, then the market price of the ETF moves up by 2% to $102 on the same day. Again, when the index goes up by another 1% to 10,201 on day 2, the ETF value goes up by another 2% to $104.04. Over the last two days, the index is up 2.01% while the ETF is up 4.04% (approximately two times as stated by the fund objective). Thus, the performance of the fund and index can vary if we take longer periods for consideration.
Investors should also note that leveraged ETFs involve a great deal of risk when compared to the traditional funds. They are often more costly and can be less tax-efficient, as they can see capital gains through the use of swaps and other derivative instruments.
How to Play?
The space remains incredibly popular for investors looking to mint money in a very short period of time, provided the trend remains a friend. For these traders, there are close to 175 leveraged funds in the space targeting different asset classes.
In this article, we take a look at the 10 biggest and most-popular ETFs for those investors who are new to the leveraged technique. While these products might not necessarily be the best choices in their respective markets, they have become popular vehicles in this sector. Here’s a quick guide:
ProShares UltraPro QQQ (TQQQ - Free Report)
Leveraged Factor: 3x
Benchmark Index: NASDAQ-100 Index
This is the most-popular and liquid ETF in the leveraged space with AUM of $11.1 billion and an average daily volume of 36.7 million shares a day. The fund seeks to deliver three times the return of the daily performance of the NASDAQ-100 Index, charging investors 0.95% in expense ratio (read: Leveraged ETFs That Gained Double Digits in April).
ProShares Ultra QQQ (QLD - Free Report)
Leveraged Factor: 2x
Benchmark Index: NASDAQ-100 Index
This fund also tracks the NASDAQ-100 Index but offers twice the returns of the daily performance with the same expense ratio of TQQQ. It has managed AUM of $4 billion and sees 1.6 million in average daily volume.
ProShares Ultra S&P500 ETF (SSO - Free Report)
Leveraged Factor: 2x
Benchmark Index: S&P 500 Index
This product provides two times exposure to the S&P 500 Index, charging 91 bps in fees and expenses. It has been able to manage $3.9 billion in its asset base with daily trading volume of around 2.1 million shares (read: 5 Top Stocks at the Forefront of S&P 500 ETF Rally This Year).
Direxion Daily Semiconductor Bull 3x Shares (SOXL - Free Report)
Leveraged Factor: 3x
Benchmark Index: PHLX Semiconductor Sector Index
This ETF targets the semiconductor corner of the technology sector with three times leveraged exposure to the PHLX Semiconductor Sector Index. It has amassed about $3.9 billion in its asset base while charging 94 bps in fees per year. Volume is good as it exchanges 19.1 million shares per day, on average.
Direxion Daily Financial Bull 3x Shares (FAS - Free Report)
Leveraged Factor: 3x
Benchmark Index: Russell 1000 Financial Services Index
This ETF seeks to make a large profit from the bullish trend in the financial sector. It provides three times exposure to the performance of the Russell 1000 Financial Services Index. The fund has amassed nearly $3.4 billion in its asset base while trading in volume of around 1.7 million shares. It charges 94 bps in annual fees (read: Q1 Earnings Effect: 5 Must-Watch ETF Charts).
ProShares UltraPro S&P500 ETF (UPRO - Free Report)
Leveraged Factor: 3x
Benchmark Index: S&P 500 Index
This product provides triple leveraged play to the S&P 500 Index, charging 93 bps in fees and expenses. It has been able to manage $2.4 billion in its asset base with daily trading volume of around 4.1 million shares.
Direxion Daily S&P 500 Bull 3x Shares (SPXL - Free Report)
Leveraged Factor: 3x
Benchmark Index: S&P 500 Index
Like UPRO, this fund also creates 3X long position in the S&P 500 Index with an expense ratio of 0.95%. It has AUM of $2.2 billion and trades in an average daily volume of nearly 6.3 million shares.
Direxion Daily Technology Bull 3x Shares (TECL - Free Report)
Leveraged Factor: 3x
Benchmark Index: Technology Select Sector Index
This ETF targets the broad technology sector with three times exposure to the Technology Select Sector Index. It has amassed about $1.9 billion in its asset base and charges 95 bps in fees per year. Volume is good as it exchanges around 2 million shares a day, on average.
Direxion Daily Small Cap Bull 3x Shares (TNA - Free Report)
Leveraged Factor: 3x
Benchmark Index: Russell 2000 Index
This product offers triple exposure to the small-cap space by tracking the Russell 2000 Index, charging 95 bps in fees and expenses. It has amassed $1.6 billion in its asset base and sees a solid volume of 7.7 million shares a day on average.
BMO REX MicroSectors FANG+ Index 3X Leveraged ETN (FNGU - Free Report)
Leveraged Factor: 3x
Benchmark Index: NYSE FANG Index
This note seeks to offer three times leveraged exposure to the NYSE FANG Index, charging 95 bps in annual fees. The ETN has accumulated $1.3 billion in its asset base and trades in an average daily volume of 5.3 million shares.
Bottom Line
Investors should note that ProShares and Direxion have been the leaders in the leveraged ETF space with most of the popular products coming from these issuers. These ETFs are not confined to one asset class or a specific sector but are spread out across various corners of the world. With a bullish outlook, these funds could pile up abnormal returns in a shorter period of time.
Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>