The stock market is currently seeing a deluge of leveraged ETF products. A leveraged ETF (exchange traded fund) is a security that uses debt to boost its returns. For example, if a leveraged ETF has a 2:1 ratio, it means that every dollar of investor capital is matched with a dollar of invested debt. The use of leverage theoretically boosts the return of the underlying index that the security tracks. Under the 2:1 ratio, if the index has a return of 1% the ETF should return 2% but management fees and transaction costs would reduce this. Leveraged ETFs are executed using financial instruments like index futures, swaps and options. There are currently some 150 leveraged ETFs which have captured some $35 billion in investor capital as indicated by my stock watching software.
If you are thinking of investing in these products you should definitely proceed with caution. Why? Well there are some misconceptions around leveraged ETFs which mislead investors into believing they’ll earn double the return of the underlying index when in fact they won’t. Although the investor might enjoy a string of doubled daily returns, this is definitely not the same as enjoying doubled annual returns. This creates a deceptive impression of a high level of performance. Also, these funds have been marketed as X2, but the only way they can maintain their leverage ratio is by constant trading of shares, buying when prices are high and selling when they fall. This increases the underlying volatility in the index, leading to large sell-offs when markets are down which would be difficult if not impossible to recover from when the next bull market rolls around. Thus, the best leveraged investments still remain index futures or call options.
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Trading ETFs: Gaining an Edge with Technical Analysis (Bloomberg Financial) List Price: Sale Price: $39.97  |
DescriptionA comprehensive catalog of exchange-traded funds and insights into successful trading techniquesThis Second Edition of the bestselling Trading ETFs offers an updated version of the definitive guide to this vital part of the capital markets... |
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Trading ETFs: Gaining an Edge with Technical Analysis (Bloomberg Financial) List Price: |
DescriptionA comprehensive catalog of exchange-traded funds and insights into successful trading techniquesThis Second Edition of the bestselling Trading ETFs offers an updated version of the definitive guide to this vital part of the capital markets... |
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Secrets of Leveraged ETF Trading: What Wall Street Does Not Want You to Know List Price: Sale Price: $16.64 |
DescriptionSecrets of Leveraged ETF Trading offers the would be speculator a unique trading vehicle by which to extract extreme wealth from the stock market. This small but powerful guide shares Wall Street's best best kept secret... |
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Setting Aside Myths About Leveraged ETFs List Price: |
DescriptionThis is the eBook version of the printed book.This Element is an excerpt from The ETF Trend Following Playbook: Profiting from Trends in Bull or Bear Markets with Exchange Traded Funds (ISBN: 9780137029013) by Tom Lydon... |
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Elite Patterns for ETFs and Stocks: Intraday Trading Strategies for High Profit List Price: Sale Price: $35.35 |
DescriptionOne more book about traditional chart patterns? No, this book focuses only on unique Elite patterns, which provide the highest potential profit in short-term trading for ETFs, leveraged ETFs and stock... |
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