Are Leveraged ETFs a good idea?

A Deep Dive into the World of High-Risk, High-Reward Investments

Jun 20, 2023

Leia EM PORTUGÊS CLICANDO AQUI

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Are Leveraged ETFs a good idea?
1. Higher Potential Return
2. Risk Management Can Limit Losses
3. Higher Potential Return with Risk Limited Provides Higher Expectancy Ratio
Case Study 1
Case Study 2
Bottom Line
FAQ
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Are Leveraged ETFs a good idea? A Deep Dive into the World of High-Risk, High-Reward Investments

This question has been echoing in the minds of investors worldwide.

The answer, in a nutshell, is:

YES, Leveraged ETFs are a good idea, if the investor has a strong risk management system

Now, let's delve into the details.

1. Higher Potential Return

Leveraged ETFs are designed to provide a multiple of the daily return of the underlying index.

For instance, a 2x leveraged ETF aims to deliver double the daily return of its benchmark.

This means that if the index increases by 1%, the leveraged ETF aims to increase by 2%.

This potential for higher returns can be attractive to investors looking to maximize their profits in a short period.

However, it's important to remember that this also means the losses can be magnified if the market moves against the investor, so, the investor must have a strong risk management system.

2. Risk Management Can Limit Losses

While leveraged ETFs can provide higher potential returns, they also come with higher risks.

This is where a strong risk management system comes into play.

For this the investor must:

Have a system to objectively set the Position Sizing to when win, win big, and when lose, lose small.

Buy and Sell the Leveraged ETFs accordingly with the Market Cycle of the benchmark of the ETF.

Set stop losses orders as “air bags” for “black swans” moments.

3. Higher Potential Return with Risk Limited Provides Higher Expectancy Ratio

When you combine the potential for higher returns with a strong risk management system, you can achieve a higher expectancy ratio.

This ratio is a formula used by investors to determine how much they can expect to make for each dollar they risk over the long term.

A higher expectancy ratio means a more profitable trading system.

Therefore, while leveraged ETFs can be risky, they can also be a good idea for investors who have a robust risk management system in place.

Case Study 1

In this example, let’s compare the ETFs SPY 0.00%↑ and SPXL 0.00%↑ , the first follows the S&P500 index and the second too, but 3X leveraged.

Observe the graphs bellow when both ETFs where in Positive Market Cycle :

Leveraged ETF SPXL from Aug/2020 to Feb/2022 (Trendspider Platform)

ETF SPY from Jul/2020 to Feb/2022 (Trendspider Platform)

In this Cycle, both assets gave positive results, but as expected, the result of the Leveraged ETF was 3X greater. SPXL 0.00%↑ : +142.51% / SPY 0.00%↑ : +45.58% .

Now Let’s see the other face…

Case Study 2

In this example, we will compare again the ETFs SPY 0.00%↑ and SPXL 0.00%↑ , but in 2018, where the market interrupted a cycle abruptly.

Leveraged ETF SPXL from Jul/2018 to Nov/2022 (Trendspider Platform)

ETF SPY from Jul/2018 to Nov/2022 (Trendspider Platform)

In this example, both assets gave negative results, but as expected, the result of the Leveraged ETF was 3X greater. SPXL 0.00%↑ : -11.86% / SPY 0.00%↑ : -3.54%.

Bottom Line

When we expand the data of the ETFs SPY 0.00%↑ and SPXL 0.00%↑ we validate our answer that yes, Leveraged ETFs is a good idea, but if, and only if, you know how to read the Cycles and get in and get out at the exact time of this assets.

In conclusion, leveraged ETFs can be a good idea for the right investor.

They offer the potential for higher returns and can be a valuable tool for short-term trading. However, they also come with increased risk.

Therefore, they are not suitable for everyone. Investors need to have a strong risk management system in place and be comfortable with the potential for significant losses.

As with any investment strategy, it's important to do your research and understand what you're getting into before you invest.

FAQ

What are leveraged ETFs?

Leveraged ETFs, a type of exchange-traded fund (ETF) that uses financial derivatives and debt to amplify the returns of an underlying index, have been a hot topic in the investment world. They offer the potential for significant returns, but they also come with a high level of risk.

What is the highest leveraged ETF?

The highest leveraged ETFs available to investors are 3x or "triple" leveraged ETFs. These ETFs aim to deliver three times the daily performance of their underlying index.

Is there a 3X QQQ?

Yes, there is a 3x leveraged ETF that tracks the NASDAQ-100 Index, which is often associated with the ticker symbol QQQ. The ProShares UltraPro QQQ TQQQ 0.00%↑ is designed to deliver three times the daily performance of the NASDAQ-100 Index.

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