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Direxion ETFs
www.direxion.c...
PROSHARES LEVERAGED AND INVERSE S&P 500 ETFS
www.proshares....
What Is a Leveraged ETF?
A leveraged exchange-traded fund (ETF) is a marketable security that uses financial derivatives and debt to amplify the returns of an underlying index. While a traditional exchange-traded fund typically tracks the securities in its underlying index on a one-to-one basis, a leveraged ETF may aim for a 2:1 or 3:1 ratio.
Leveraged ETFs are available for most indexes, such as the Nasdaq 100 Index and the Dow Jones Industrial Average (DJIA).
Leveraged ETFs Explained
ETFs are funds that contain a basket of securities that are from the index that they track. For example, ETFs that track the S&P 500 Index will contain the 500 stocks in the S&P. Typically, if the S&P moves 1%, the ETF will also move by 1%.
A leveraged ETF that tracks the S&P might use financial products and debt that magnify each 1% gain in the S&P to a 2% or 3% gain. The extent of the gain is contingent on the amount of leverage used in the ETF. Leveraging is an investing strategy that uses borrowed funds to buy options and futures to increase the impact of price movements.
However, leverage can work in the opposite direction as well and lead to losses for investors. If the underlying index falls by 1%, the loss is magnified by the leverage. Leverage is a double-edged sword meaning it can lead to significant gains, but it can also lead to significant losses. Investors should be aware of the risks to leveraged ETFs since the risk of losses is far higher than those from traditional investments.
How Leveraged ETFs Work or Don't Work
If you look into the descriptions of leveraged ETFs, they promise two to three times the returns of a respective index, which they do, on occasion. Leveraged ETFs boost results, not by actually borrowing money, but by using a combination of swaps and other derivatives. Let's look at a few examples of how ETFs don't always work the way you would expect.
The ProShares Ultra S&P 500 (SSO) is an ETF designed to return twice the S&P 500. If the S&P 500 returns 1%, the SSO should return about 2%. But let's look at an actual example. During the first half of 2009, the S&P 500 rose about 1.8%. If the SSO had worked, you would expect a 3.6% return. In reality, the SSO went down from $26.27 to $26.14. Instead of returning 3.6%, the ETF was essentially flat.
It's even more troubling when you look at the SSO along with its counterpart, the ProShares Ultra Short S&P 500 (SDS), which is designed to return twice the opposite of the S&P 500. Over the 12 months ending June 30, 2009, the S&P 500 was down nearly 30%. The SSO behaved pretty well and was down about 60%, as you would expect. The SDS, however, was down about 20%, when it was expected to be up 60%.
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#ETFs #ExchangeTradedFunds #LeveragedInvesting
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