In the world of investing, ETFs are used by investors to gain access to portfolios of securities they could not otherwise afford. Stock index ETFs allow investors to gain exposure to broad baskets of stocks.
But there are more exotic ETFs, called “leveraged” ETFs. These ETFs lure investors into believing they can amplify their returns over time, but that’s not necessarily the case.
There are pitfalls when investing in leveraged ETFs that you should know about before making any trades in them, as they behave differently from the benchmarks/indices they track.
While leveraged ETFs can deliver outsized returns in the short-term, they are not meant to be held as long-term investments.
In this video, we will cover what leveraged ETFs are, and go through examples comparing their performance relative to the benchmarks they track.
0:00 – Introduction
0:36 – What is an Exchange-Traded Fund (ETF)
2:24 – What is a Leveraged ETF?
5:36 – Example #1 (TQQQ vs. QQQ)
8:30 – Example #2 (SPXL vs. SPX)
10:16 – Why Leveraged ETF Returns Vary vs. the Underlying Index
I focused mainly on the pitfalls of leveraged ETFs in this video, but I should mention that they can be used powerfully IF the direction is predicted correctly. Of course, it’s impossible to consistently predict short-term stock market movements, which makes leveraged ETFs very risky vehicles to use. But for those looking for short-term leverage, they can be great short-term products to use.
I will do a video covering the benefits of using leveraged ETFs in the near future!
Please leave a comment below this video if you have any questions, or if you’d like to add some of your own. As always, I’d love to hear from you/chat with you.
==== Additional Videos & Resources ====
SPXL ETF Info: https://www.direxion.com/product/daily-sp-500-bull-bear-3x-etfs
TQQQ ETF Info: https://www.proshares.com/funds/tqqq.html