Leverage ETF Trading Guide: Mastering Investment Strategies in Volatile Markets
Popular Leveraged ETFs among Australian Investors
In the past two months, highly elastic assets such as the Philadelphia Semiconductor Index and the NASDAQ index have experienced significant volatility. As market volatility increases, the trading volume of leveraged ETFs has also risen, making them a favorite among investors.
This article discusses key considerations for trading popular leveraged ETFs and how to choose the right timing for leveraged ETF trades.
The greatest advantage of leveraged ETFs is that they can amplify returns without the need for margin. Leveraged ETFs can apply multiple levels of leverage to the performance of the underlying asset they track. Currently, most single-stock leveraged ETFs offer leverage ratios of 1.25x, 1.5x, 2x, or 3x. For example, $ProShares UltraPro QQQ ETF (TQQQ.US)$ is a 3x leveraged ETF designed to achieve three times the daily return of the NASDAQ-100 Index. As shown in the comparison chart below, TQQQ exhibits significantly higher volatility compared to the NASDAQ-100. On August 13, the NASDAQ-100 rose by 2.5%, while TQQQ surged by 7.3%.
Here are some of the most popular leveraged ETFs in the market, along with a brief introduction for investors：
How to trade leveraged ETFs in volatile markets
Despite the attractive potential gains, if you bet in the wrong direction, losses will also be amplified. This requires investors to have a certain ability to analyze stocks and, in a volatile market, to choose the appropriate leveraged ETF based on the expected direction of future stock price movements.
We will take a recent period of market volatility as an example to illustrate specific operations for leveraged ETFs. The recent market fluctuations have been influenced by multiple factors such as "Trump trades," "rate cut trades," "recession trades," and "reversal of arbitrage trades."
1. First Phase: Pricing in Rate Cuts
The recent decline in the NASDAQ-100 began with the release of June CPI data. On July 11, the U.S. June unadjusted CPI year-over-year was recorded at 3.0%, lower than the market expectation of 3.1%, marking the lowest level since June of the previous year. Despite the overall cooling of June inflation, the NASDAQ-100 plummeted by 2.2%, with large tech stocks exhibiting a "sell the news" behavior. As the certainty of rate cuts increased, large tech stocks were no longer the only choice for investors, and the attractiveness of the small-cap index $iShares Russell 2000 ETF (IWM.US)$ rose. From that point, inverse leveraged products like $ProShares UltraPro Short QQQ ETF (SQQQ.US)$ and $Direxion Daily Semiconductor Bear 3x Shares ETF (SOXS.US)$ began to rise.
2. Second Phase: Poor Tech Earnings Exacerbate NASDAQ Decline
During this second-quarter earnings season, disappointing performances or future guidance from major tech stocks such as Tesla, Google, and Meta, coupled with high valuations, led investors to set very high expectations for earnings. Any performance weaker than expected triggered significant stock price drops, further exacerbating the NASDAQ's decline.
3. Third Phase: Market Fears Recession
On August 1, the U.S. Department of Labor reported a surge in unemployment claims, marking the largest drop in employment in four years, heightening fears of an economic recession. The market's trading logic shifted to recession expectations, continuing the downward trend of the NASDAQ.
4. Fourth Phase: Market Stabilizes After Liquidity Crisis
A liquidity crisis in Japan, triggered by the unwinding of yen carry trades, led to a massive sell-off of yen and Japanese stocks to cover short positions. This turmoil quickly spread to global markets, causing a sharp increase in U.S. market volatility, with the VIX spiking to 65, leading to a "Black Monday" for U.S. stocks. From July 11 to August 5, SQQQ cumulatively rose by 40%.
At this point, the NASDAQ-100 had declined for nearly a month, with valuation levels decreasing. Following the resolution of the liquidity crisis, the market gradually stabilized and rebounded. $ProShares UltraPro QQQ ETF (TQQQ.US)$ and $Direxion Daily Semiconductor Bull 3x Shares ETF (SOXL.US)$ began to rebound rapidly, with TQQQ rising 18% from its bottom to the present.
However, leveraged and inverse ETFs are based on the daily performance of the stock price. In summary, these ETFs perform well in a trending market, but in a market with unclear direction or volatility, their "Rebalance" mechanism will frequently adjust the portfolio based on the performance of the underlying asset, leading to more decay and underperformance compared to expectations.
What should we do if the market fluctuates within a certain range?
As mentioned above, leveraged ETFs are more suitable for trending markets. If the market fluctuates within a certain range and the investor plans to hold long-term, what trading strategy can be chosen?
At this time, a Covered Call strategy can be chosen. A Covered Call consists of buying the underlying stock and selling a corresponding number of call options. The advantage of this strategy is that it can help hedge against short-term stock price declines while the investor is bullish on the stock's long-term performance. By selling call options, the investor can earn option premiums when the stock price declines or remains flat.
Applying the Covered Call strategy to fund management results in a Covered Call ETF. Common Covered Call ETFs include $Global X Nasdaq 100 Covered Call ETF (QYLD.US)$ , which hedges against NASDAQ-100 index volatility, and $Global X S&P 500 Covered Call ETF (XYLD.US)$ , which hedges against S&P 500 index volatility.
Covered Call ETFs can also serve as a supplement or alternative to fixed-income investments. Most of these options distribute dividends monthly, with dividend yields far exceeding those of other low-risk investments, providing relatively stable additional income for investors.
According to QYLD's announcement, the ETF consists of "holding NASDAQ-100 index assets while selling one-month at-the-money call options," with an annual dividend yield of 12%.
However, due to the strategy's limitations, Covered Call ETFs often underperform leveraged ETFs during a one-sided uptrend.
In summary, the key points for trading leveraged ETFs are:
Leveraged and inverse ETFs are more suitable for capturing short-term trending market opportunities. Holding them long-term involves relatively high risk (unless the relevant asset maintains a long-term upward trend).
Directional judgment is crucial. Investors need to closely follow trends to execute trades and capture key reversal moments. For example, pay attention to the release times of important economic data, as these often trigger shifts in market trends, and consider the impact of earnings reports from major stocks on the indices.
If the market fluctuates within a certain range, investors may opt for Covered Call ETFs.
Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only.
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