Moo Brief: Already winning? How about a Win-Win with leveraged ETFs!
What is a Leveraged ETF?
A leveraged ETF is an investment fund designed to amplify the returns of an underlying asset, typically an index. These funds aim to deliver multiple of the daily performance of the index they track, allowing investors to potentially achieve higher returns in a shorter time frame.
An example of a leveraged ETF is the $ProShares UltraPro QQQ ETF (TQQQ.US)$, which aims to deliver three times the daily returns of the Nadasq 100 index.
In other words, if the Nasdaq 100 is up 1% within a day, TQQQ should be up about 3% that day. Conversely, if the index falls by 1%, TQQQ will also fall by 3%.
What is the underlying asset?
The underlying assets of a leveraged ETF usually consist of the ETFs themselves along with financial derivatives such as swaps. Swaps are contracts that allow leveraged ETFs to achieve their goal of magnifying daily returns. By using these derivatives, leveraged ETFs can effectively create exposure that is several times that of the underlying index.
Two important considerations before buying:
Before investing in leveraged ETFs, there are two critical factors to consider:
1. High operating costs: Leveraged ETFs generally have higher management fees compared to traditional ETFs. Additionally, costs associated with swap agreements can significantly impact overall returns, making it essential for investors to be aware of these expenses.
2. Volatility decay: Leveraged ETFs are susceptible to volatility decay, which can erode returns over time. Because these funds are designed to track daily performance, the compounding effects in volatile markets can lead to unexpected losses, even if the underlying index returns to its original level.
When to use leveraged ETFs?
Leveraged ETFs are particularly suited for short-term trading. They can be effective for traders looking to capitalize on upward market trends, especially when they anticipate strong, one-directional price movements. However, due to high fees and the risks of volatility decay, these instruments are not ideal for long-term investment. Instead, they are best utilized in bullish scenarios where traders can manage their risks and close positions at the end of each trading day.
Examples:
The real life example is not far away:
$Tesla (TSLA.US)$ : After Trump won the election, Tesla's stock surged from $251.44 to $350.00 in just four days, a remarkable 39.2% increase. Correspondingly, the leveraged ETF $Direxion Daily TSLA Bull 2X Shares (TSLL.US)$ skyrocketed from $11.98 to $22.50, reflecting an impressive 87.81% gain, highlighting the potential for amplified returns in bullish markets.
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Congratulations to @TANDOTwho rode the wave of $Direxion Daily TSLA Bull 2X Shares (TSLL.US)$
$Direxion Daily FTSE China Bull 3X Shares ETF (YINN.US)$: US-listed Chinese stocks ETFs have experienced significant gains, following new stimulus measures announced by the People's Bank of China aimed at revitalizing the struggling economy at the end of September this year. YINN soared about 131.9% while the underlying index surged about 33.8% in the same time period.
Read more >>Is Leveraged ETF Suitable for Long-Term Investment?
Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only.
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102362254 : Leveraged ETFs are powerful but risky, ideal for short-term trades. Due to daily resets, their performance can drift from the index, especially in volatile markets. They amplify gains and losses, so use stop-losses and have an exit plan. Active monitoring is key
Jason Fung : Leveraged ETFs are designed for short-term trading, as they aim to deliver a multiple (e.g. 2x, 3x) of the daily performance of their benchmark. It can be a powerful tool if you are into day trading but holding them for longer periods can lead to performance decay due to daily rebalancing. They also incur higher fees and expenses compared to traditional ETFs. I personally would just buy the traditional ETF to keep things simple.