Leveraged Exchange-Traded Funds (ETFs), also called Geared ETFs, are designed to amplify daily returns of an index. They use financial derivatives like swaps and futures to achieve multiple returns in a day, unlike regular ETFs that just mirror an index’s performance over time.
What Are Leveraged ETFs?
Leveraged Exchange-Traded Funds (ETFs) aim to amplify the returns of a benchmark index. Unlike traditional ETFs, which track the performance of an index 1:1, leveraged ETFs seek to deliver multiples of that performance—commonly 100%, 200%, or 300% of the daily returns.
These funds also offer inverse exposure for bearish markets, aiming for -100%, -200%, or -300% of the index’s daily performance. For instance, Direxion Daily Leveraged ETFs provide either 200% or 300% of the benchmark’s positive returns or the inverse for negative performance.
How Do Leveraged ETFs Work?
Leveraged ETFs achieve their goals by using financial derivatives such as futures contracts, options, and swaps. These tools enable the fund to gain increased exposure to the index it tracks. Each day, leveraged ETFs reset their leverage ratio to maintain their target multiple of the index’s performance.
This daily rebalancing can sometimes result in performance decay, especially in volatile or sideways markets. Direxion Daily Leveraged ETFs, for example, rebalance their portfolios at the end of each trading day to ensure the desired leverage is maintained.
By using a variety of brokers, these ETFs also mitigate counterparty risk.
Risks and Rewards of Leveraged ETFs
Leveraged ETFs carry significant risks due to their inherent leverage. While the potential for high returns exists, especially in strong, trending markets, the possibility of substantial losses is equally high.
The daily reset mechanism can compound losses over time, making them particularly volatile and unsuitable for long-term holding. Investors face increased costs and risk levels due to the complex strategies employed by these funds.
Market conditions play a critical role in the performance of leveraged ETFs. In stable, bullish markets, these funds can outperform their benchmarks significantly. However, in choppy or unpredictable markets, the daily rebalancing can lead to diminished returns, often failing to match the long-term performance of the index.
The U.S. Securities and Exchange Commission (SEC) cautions that the long-term performance of leveraged ETFs can diverge markedly from their short-term results, stressing the need for investors to fully understand these instruments and employ careful entry and exit strategies.
Top Leveraged ETFs To Watch In 2024
In 2024, investors looking to capitalize on high-performing leveraged ETFs have several noteworthy options. These funds, known for their potential for high returns, offer a balanced risk-reward profile.
As the ETF market evolves, these Bull and Bear ETFs stand out for their impressive performance metrics and strategic portfolio selections. Here are the top leveraged ETFs to watch in 2024:
ProShares UltraPro QQQ (TQQQ)
The ProShares UltraPro QQQ (TQQQ) aims to triple the daily performance of the Nasdaq-100 Index. It is a top pick for growth-seeking investors, particularly in the technology sector. TQQQ is popular due to its significant trading volume and relatively low expense ratio of 0.95%.
Its strong performance and stability in volatile markets make it a solid choice for investors aiming to leverage the tech industry’s potential.
Direxion Daily Semiconductor Bull 3X Shares (SOXL)
The Direxion Daily Semiconductor Bull 3X Shares (SOXL) seeks to achieve three times the daily results of the PHLX Semiconductor Sector Index. This ETF is ideal for investors looking to benefit from growth and innovation in the semiconductor industry.
With an average daily trading volume and an expense ratio of 1.07%, SOXL is recognized as a high performer. Its significant role in the technology sector positions it as a promising option for 2024.
ProShares Ultra S&P 500 (SSO)
The ProShares Ultra S&P 500 (SSO) targets doubling the daily return of the S&P 500 Index, making it an attractive choice for those seeking broader market exposure. SSO features an expense ratio of 0.91% and substantial assets under management, offering an efficient way to leverage market uptrends.
Its consistent performance appeals to a wide range of investors looking to enhance their exposure to the overall market.
Direxion Daily Energy Bull 2x Shares (ERX)
The Direxion Daily Energy Bull 2x Shares (ERX) delivers twice the daily performance of the Energy Select Sector Index. This ETF is tailored for investors interested in the energy market, offering a balanced risk-reward profile. With an expense ratio of 1.10%, ERX stands out among leveraged ETFs.
Its focus on the booming energy sector and its potential for significant gains make it a key pick for 2024.
Leveraged ETFs like these offer investors opportunities to amplify their returns in specific market segments. However, it’s crucial to understand the inherent risks and manage them appropriately.
Keeping an eye on these high-performing leveraged ETFs can help investors navigate the dynamic 2024 market effectively.
Best Performing Leveraged ETFs of 2024
In 2024, leveraged ETFs demonstrated significant variability in performance, with some funds achieving exceptional gains, providing substantial benefits to investors seeking amplified exposure.
ProShares Ultra Semiconductors (USD)
ProShares Ultra Semiconductors (USD) stood out with a remarkable gain of 53.7%. This ETF, which focuses on the semiconductor sector, benefits from the robust performance and growth potential within the tech industry.
The fund boasts a daily trading volume of 227,000 shares and manages assets worth $1.4 billion. It operates with an expense ratio of 95 basis points (bps), making it an attractive option for investors looking for high returns in the semiconductor market.
ProShares Ultra Silver (AGQ)
Another high performer, ProShares Ultra Silver (AGQ), saw a significant rise of 44.8%. This ETF provides leveraged exposure to silver prices, attracting investors seeking to capitalize on the precious metal’s market movements.
AGQ experiences a substantial daily trade volume of 1.4 million shares and holds $563.8 million in assets, with an expense ratio of 95 bps. Its popularity and high liquidity make it a favored choice for those looking to invest in silver.
MicroSectors Gold Miners 3X Leveraged ETN (GDXU)
The MicroSectors Gold Miners 3X Leveraged ETN (GDXU) achieved a notable 34.3% gain. This ETF offers triple-leveraged exposure to the gold mining sector, which has been buoyed by rising gold prices and increased investor interest in precious metals.
GDXU has a daily trading volume of 898,000 shares and manages $270.8 million in assets, also operating with a 95 bps fee. Its performance underscores the potential of leveraged ETFs in commodity sectors.
BMO REX MicroSectors FANG+ Index 3X Leveraged ETN (FNGU)
BMO REX MicroSectors FANG+ Index 3X Leveraged ETN (FNGU) reported a 30.5% increase. This ETF targets the high-growth technology and consumer discretionary sectors represented by the FANG+ Index.
FNGU manages an impressive $5.9 billion in assets, with a daily trading volume of 878,000 shares, and charges a fee of 95 bps. The fund’s significant asset base and high trading volume reflect its strong appeal to investors seeking leveraged exposure to major tech companies.
Direxion Daily Concentrated Qs Bull 2X Shares (QQQU)
Direxion Daily Concentrated Qs Bull 2X Shares (QQQU) also demonstrated strong performance with a gain of 25.2%. This ETF provides leveraged exposure to a concentrated portfolio of major technology stocks.
Despite managing relatively smaller assets of $9.4 million and a lower daily trading volume of 9,000 shares, QQQU remains an option for investors looking for focused tech sector exposure with leveraged benefits.
| ETF | Performance Increase (2024) | Assets (Million USD) | Annual Fees (bps) | Average Daily Volume |
|---|---|---|---|---|
| ProShares Ultra Semiconductors (USD) | 53.7% | 1.4 | 95 | 227,000 shares |
| ProShares Ultra Silver (AGQ) | 44.8% | 563.8 | 95 | 1.4 million shares |
| MicroSectors Gold Miners 3X Leveraged ETN (GDXU) | 34.3% | 270.8 | 95 | 898,000 shares |
| BMO REX MicroSectors FANG+ Index 3X Leveraged ETN (FNGU) | 30.5% | 5.9 | 95 | 878,000 shares |
| Direxion Daily Concentrated Qs Bull 2X Shares (QQQU) | 25.2% | 9.4 | 107 | 9,000 shares |
Is It Worth Investing in Leveraged ETFs?
Investing in leveraged ETFs can offer substantial returns but also comes with significant risks. These investment vehicles are designed to provide amplified exposure to a specific index or sector, often aiming to deliver 2x or 3x the daily returns.
Potential Rewards
- High Return Potential Leveraged ETFs can deliver substantial gains in a short period, particularly in bullish markets.
For instance, the ProShares UltraPro QQQ (TQQQ) aims to provide triple the daily performance of the Nasdaq-100 Index. During periods of strong market performance, such leveraged exposure can lead to significant returns. - Strategic Short-Term Investment These ETFs are often used for short-term trading rather than long-term investments. They allow traders to capitalize on short-term market movements and volatility.
In bullish and stable markets, leveraged ETFs can outperform their benchmarks significantly, making them attractive for day traders and short-term investors. - Diversification and Hedging Leveraged ETFs can also be used for hedging purposes. Inverse leveraged ETFs, which aim to deliver the opposite of the index’s performance, can serve as a hedge against market downturns.
For example, the ProShares UltraPro Short S&P 500 (SPXU) aims to provide triple the inverse of the S&P 500’s daily performance, offering a potential buffer during market declines.
Potential Risks
- High Volatility The amplified exposure in leveraged ETFs means that both gains and losses are magnified. This makes them highly volatile and risky, particularly in choppy or declining markets. Investors must be prepared for significant fluctuations in their investment value.
- Daily Reset and Compounding Leveraged ETFs reset daily to maintain their leverage ratio, which can lead to performance issues over longer periods due to the effects of compounding. In volatile markets, this daily reset can cause the ETF’s performance to diverge significantly from the underlying index, resulting in potential losses even if the index trends positively over time.
- Increased Costs Leveraged ETFs often have higher expense ratios due to the complex strategies and frequent trading required to maintain leverage. These costs can erode returns over time, making it essential for investors to weigh the potential gains against these additional expenses.
Suitability for Investors
- Short-Term Traders Leveraged ETFs are particularly suited for short-term traders who can monitor their investments closely and have a high-risk tolerance. These investors can take advantage of the amplified daily movements to achieve substantial returns in a short timeframe.
- Experienced Investors Experienced investors who understand the mechanics and risks of leveraged ETFs might find them a useful tool for specific strategies, such as hedging or tactical allocation. It’s crucial for these investors to have a clear exit strategy and regularly monitor market conditions.
