Your Guide to 3x Leveraged Exchange Traded Funds (ETFs) (2024)

FAQs

Your Guide to 3x Leveraged Exchange Traded Funds (ETFs)? ›

3x leveraged ETFs look to generate three times the returns of the underlying index. This also means 3x leveraged ETFs also will generate losses that are three times that of the index. It's also key to know that the return is expected on the daily return, not the annual return.

However, 3x exchange-traded funds (ETFs) are especially risky because they utilize more leverage in an attempt to achieve higher returns. Leveraged ETFs may be useful for short-term trading purposes, but they have significant risks in the long run.

ProShares UltraPro QQQ is the most popular and liquid ETF in the leveraged space, with AUM of $21.9 billion and an average daily volume of 67.3 million shares a day. The fund seeks to deliver three times the return of the daily performance of the NASDAQ-100 Index, charging investors 0.88% in annual fees.

These leveraged ETFs seek a return that is 300% or -300% of the return of their benchmark index for a single day. The funds should not be expected to provide three times or negative three times the return of the benchmark's cumulative return for periods greater than a day.

The intrinsic value of SOXL largely depends on one's outlook on the semiconductor industry's growth trajectory. As a leveraged ETF, it is not typically viewed as a long-term investment due to its daily reset mechanism, designed primarily for short-term trading strategies.

BMO has launched the first quadruple leveraged ETN fund that tracks the S&P 500. The fund will trade under the ticker symbol "XXXX" and seeks to generate four time the S&P 500's return on a daily basis. The launch come as bullishness rise among investors and Wall Street predicts more gains to come in 2024.

Nearly all leveraged ETFs come with a prominent warning in their prospectus: they are not designed for long-term holding. The combination of leverage, market volatility, and an unfavorable sequence of returns can lead to disastrous outcomes.

Longtime ETF analyst Todd Sohn of Strategas Securities said the Leverage Shares 5x Long Magnificent Seven ETP UK:MAG7 appears to be the most heavily levered product available to trade in any developed market, although a seven-times levered index on oil and gas futures exists in Europe.

Leveraged ETFs decay due to the compounding effect of daily returns, volatility of the market and the cost of leverage. The volatility drag of leveraged ETFs means that losses in the ETF can be magnified over time and they are not suitable for long-term investments.

The two major risks associated with leveraged ETFs are decay and high volatility. High volatility translates to high risk. Decay emanates from holding the ETFs for long periods.

How long should you hold a leveraged ETF? ›

The daily rebalancing of leveraged and inverse ETFs creates a situation that for periods longer than a day or two the return of a leveraged or inverse ETF will deviate from the margin account benchmark.

The Direxion Daily Junior Gold Miners Index Bull 3x Shares (JNUG) and the Direxion Daily Junior Gold Miners Index Bear 3x Shares (JDST) are the two most volatile exchange-traded funds of all. Each has a one-year volatility reading of about 170.

Direxion launched its first leveraged ETFs in 2008. In November 2008 the company was the first to offer ETFs with 3X leverage, a move that was copied some months later by its competitors ProShares and Rydex Investments.

SOXL's 50-day moving average is 42.70, which suggests SOXL is a Sell. What is SOXL's 200-day moving average? SOXL's 200-day moving average is 29.17, which suggests SOXL is a Buy.

The SOXL ETF holds a buy signal from the short-term Moving Average; at the same time, however, the long-term average holds a general sell signal. Since the longterm average is above the short-term average there is a general sell signal in the ETF giving a more negative forecast for the stock.

It is a high-risk, high-reward investment option for investors seeking to amplify their semiconductor sector exposure.

We found that leveraged ETFs in three out of the four categories provide sufficient returns over the long run to justify their costs and risks, and despite persistent tracking-error divergence. We began our research by pulling data on all leveraged ETFs that have been issued in U.S. markets over the past 10 years.

The TQQQ ETF holds a buy signal from the short-term Moving Average; at the same time, however, the long-term average holds a general sell signal. Since the longterm average is above the short-term average there is a general sell signal in the ETF giving a more negative forecast for the stock.