Leveraged or Bull ETFs are exchange-traded funds that enable you to bet with the direction of the market, sector, or index. Leveraged ETFs enable you to magnify your profits or losses using leverage without the complexity of Options contracts.
Leveraged ETFs usually have built-in leverage of 2x or 3x leverage. If you buy a 3x Leveraged ETF on any market day, and the index moves up 2%, you can expect a 6% profit. Conversely, if the market moved down 2% on that day, the 3x leveraged ETF would ensure you incur a loss of 6%.
1. Understand Leveraged ETF Decay
All Leveraged ETFs have warnings that they should only be traded on a daily basis. Of course, you can hold them for longer than one day, but you will see mismatches in the return of the short ETF vs. the actual index over time. This is known as leveraged ETF decay.
Leveraged ETFs Do Not Match the Index Performance Because:
- The underlying contracts supporting the leveraged ETFs need to be rebalanced at the end of the trading day; this causes slippage.
- The effect of the volatility of an index will affect compounding, which affects the inverse ETF. For more information, see this Leveraged ETF FAQ.
- Related Article: Our Resident ETF Trader Joe’s Leveraged ETF Strategy
2. Leveraged ETFs Should Have Good Liquidity & Volume
It is important that if you purchase a Leveraged/Bull ETF that you can actually sell it when you want to, for a price that is close to your target price. There are 124 Leveraged ETFs on the US exchanges, and the average 10-day trading volume is 1 million shares per day. You will want to choose ETFs that average at least 500,000 traded per day.
3. Choose ETFs With Higher Assets Under Management
The median amount of Net Assets under management for leveraged and inverse ETFs is $50 million. It is wise to only utilize ETFs with more than $100 million in assets managed; this helps with liquidity and the fund’s stability.
4. ETFs Should Have Low Expenses
Any Inverse or Leveraged ETF you choose to trade should have lower expense ratios. Of the 244 ETFs in this study, the average expense ratio is 0.96%, but the range of expenses spanned from 1.65% to 0.3%. The largest most liquid funds have an expense ratio between 0.95% and 1.08%, which is acceptable.
- Related Article: The 21 Best Ethical ESG ETFs
5. Use a Commission Free Broker to Minimize Costs
When purchasing ETFs, you should select a broker that enables you to buy and sell ETFs with $0 zero commissions. Firstrade has over 2,200 commission-free ETFs, the largest in the industry. Read the Firstrade Review or visit Firstrade.
6. Get High-Quality ETF Research Software
Related Articles: Finding Great Stocks With Stock Rover
- 12 Legendary Strategies to Beat the Market That [Really] Work
- Our Beat the Market Screener [Actually] Beats the Market
- 4 Easy Steps to Build The Best Buffett Stock Screener
- 6 Steps to Build an Ethical ESG Investment Portfolio
- All Value Investing Strategies & Articles
- Use a CANSLIM Stock Screener Strategy To Beat the Market
More articles related to funds
- The Difference Between ETFs and Mutual Funds is Capital Flow
- ETFs vs. Mutual Funds: The Difference Impacts Your Gains
- What is an Index Fund & How do Index Funds Work?
- Investing In Mutual Funds Pros & Cons
- How to Invest in Index Funds to Maximize Long-term Profits
- ETFs vs. Mutual Funds vs. Index Funds: Simply Explained
- Investing in Index Funds: Everything You Need to Know
- ETFs vs. Stocks. 7 Reasons ETFs Are Better