Leveraged ETFs

ETFs are collections of assets into bundles you can invest in all at once, the most popular ones follow indecies (such as SPY following the S&P 500), which is one way for an investor to build a diverse portfolio without holding dozens of individual positions.

However, using financial derivatives and debt, there are also “Leveraged ETFs”, which amplify the risks, and returns, of whichever index it is following. These ETFs are different from a normal index ETF; instead of trying to mimic the annual return of the index it follows, it tries to double, or even triple, the Daily Return. This means that if the underlying index goes up by 1%, the Double Leveraged ETF would go up by 2% (although these numbers are not exact, the leveraged ETF often performs slightly below the target due to fees and other factors). However, this means that if the index goes down 1%, the leveraged ETF will go down by 2%, so what would have been a relatively small loss can grow very quickly.

There are many types of leveraged ETFs, from index trackers, to commodity trackers (leveraged oil and gold are among the most popular), and even many inverse ETFs, where when the index goes up by 1%, the ETF goes down by 2% (this is one way to “short” an ETF without actually short-selling).

Despite the risks, leveraged ETFs are very popular for day traders, since the extra volatility, the ups and downs in the price over the course of a day, make it attractive to traders who try to “buy low and sell high” on the same security many times throughout the day.

However, always remember that leveraged ETFs are one of the riskier investments you can make; they are usually designed to be bought and sold within the same day (hence amplifying “daily” returns instead of monthly or annually).

Most Popular Double-Leveraged ETF (2x)

Most Popular Triple-Leveraged ETFs (3x)