Riding the volatility wave with leveraged ETFs
In recent weeks, the market has been significantly impacted by central bank policy signals and mixed macro data, leading to notable turbulence.
With upcoming events such as the Jackson Hole Symposium and Nvidia's second-quarter earnings release on the horizon, market fluctuations are anticipated.
Amidst this volatile environment, it is crucial to consider exploring leveraged ETFs as a potential tool to navigate opportunities and maximize potential returns, even with limited funds.
Before diving into the topic, let's review the fundamentals of ETFs. An ETF, or exchange-traded fund, is an investment fund that trades on an exchange and typically aims to track the performance of a specific index.
Leveraged ETFs seek to replicate multiples of the underlying benchmark index on a daily basis.
For instance, $ProShares UltraPro QQQ ETF (TQQQ.US)$ aims to deliver three times the daily returns of $NASDAQ 100 Index (.NDX.US)$. Similarly, 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%.
In addition to index leveraged ETFs that track a basket of stocks, there is also a relatively new investment vehicle known as individual stock leveraged ETFs, which track the performance of a single company's stock. For example, the $GraniteShares 2x Long NVDA Daily ETF (NVDL.US)$ is one of the largest individual stock leveraged ETFs tracking Nvidia.
Leveraged ETFs employ various investment strategies, including swaps, futures contracts, and derivative instruments, to achieve their leverage objectives.
To view detailed information about holdings on moomoo: search for the ETF> Fund> Holdings.
For example, the ETFs shown below primarily achieve a 2x leverage through borrowing funds and trading derivative contracts.
Images provided are not current and any security is shown for illustrative purposes only and is not a recommendation.
– Short-term trading: It can be advantageous for investors who capitalize on market volatility around the release of financial reports. By making intraday trades or holding positions for a short duration based on predictions, investors can profit from fluctuations.
– Magnification effect: If you anticipate a favorable outcome in a company's financial report, investing in the corresponding leveraged ETF could potentially amplify your returns, provided that circumstances align in your favor.
Leveraged ETFs can deliver significant short-term returns, but they are not ideal for long-term holding.
One key risk of prolonged investment in leveraged ETFs is the potential decay of volatility. The compounding effect may potentially expose investors to extra losses, especially in volatile markets.
Does this sound a bit difficult to understand? Let's look at a real example.
The chart below shows the performance of Nasdaq 100 (NDX) and TQQQ from September 9, 2022, to February 14, 2023.
Images provided are not current and any security is shown for illustrative purposes only and is not a recommendation.
– The Nasdaq 100 closed at 12588.29 on September 9, 2022, then experienced a decline for a while and finally returned to the previous level at about 12590.89 on February 14, 2023. The return of the index during this period was about 0%.
– TQQQ closed at US$29.68 on September 9, 2022. It also experienced a decline and then went back up to US$25.49 on February 14, 2023. But the return of TQQQ during this period was about -14%.
As you can see, an investor would suffer an approximately 14% loss for holding TQQQ for about five months even if the Nasdaq 100 returned to the same level after a decline.
Summary:
Therefore, before investing in leveraged ETFs, we should pay attention to the following points:
– Leveraged ETFs are a double-edged sword, which may offer the potential for substantial returns but also entail the risk of larger losses.
– Leveraged ETFs are not suitable for long-term holding, as volatility decay may erode returns and amplify losses.
– Traders should develop a risk management strategy, including setting stop-loss points to prevent significant losses from market reversals.
Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only.
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103143732 : Well explained , especially including the erosion caused by volatility!![[undefined]](https://static.moomoo.com/nnq/emoji/static/image/default/default-black.png?imageMogr2/thumbnail/36x36 "undefined")
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