What Are Leveraged ETFs?
Hello traders. Welcome to the Stock Trading Course and the fifth module, Day Trading ETFs. In this lesson we’re going to talk about leveraged ETFs. We already know what an ETF is, so it’s very important for you to understand what a leveraged ETF is.
A leveraged ETF is an ETF that uses financial derivatives and debt to amplify the returns of the underlying security. By leveraging returns, these ETFs can produce 2 to 3 times the return of a non-leveraged ETF that follows the same benchmark.
Now for example, if the S&P500; gains 1% in a day, a non-leverage ETF will also gain 1% in the same day. But a two-time leveraged ETF will gain 2% investing the same day. So a leveraged ETF doesn’t amplify the annual return of an index but instead it follows the daily changes.
This means that if the underlying asset returns 1%, the leveraged ETF will return 2% over the same period of time. And it’s important to understand that this 2-to-1 ratio works in the opposite way too, meaning that if the index drops 1%, the ETF will drop 2%.
Now, which leveraged ETFs are we going to trade? The first one is SSO, which is the ProShares UltraPro S&P500; that tracks three times the daily performance of the S&P 500. So this is three-time bull ETF of the S&P500;.
We are going to track and trade NGUT, which is a Direxion Daily Gold Miners Bull Shares ETF that tracks three times the price of gold. FAS, which is the Direxion Daily Financial Bull 3X Shares, which tracks three times the return of banks.
Now the next one is TQQQ, which is the ProShares UltraPro QQQ ETF which tracks three times the NASDAQ 100 Index. The Qs or the QQQ is the ETF that tracks the NASDAQ on a one to one ratio basis. And last but not least, we are going to trade BIB, which is the ProShares Ultra Nasdaq Biotechnology ETF that tracks two times the performance of the biotechnology sector of the NASDAQ Composite Index.
Now, I’m going to show you a chart of the S&P500; and the SSO, and I’m going to compare the moves and the returns in percentages for you so you can understand how this works.
Here’s a daily chart of the S&P500;, and the line chart is the SSO in comparison to the S&P500;. Now, this is the daily chart. I’m going to go and put on a 15 – well, I can only use the daily chart, so that’s going to be fine. I’m going to look at this move from this low to this high, and I’m going to see the percentage return of the S&P500;, and from this low to this high, which is the same move but on the SSO.
So I’m gonna grab the tool for a Long Position, and I’m going to put it from here to this high right here. So from this low to this high, the S&P500; returned 14.06%. But because the SSO is a 3X ETF, it should return three times what the S&P500; returned over the same period of time.
So let’s grab again the Long Position tool, and I’ll go from this low to this high, okay? So this is where the move ends. So on the same period of time that the S&P500; returned 14%, the SSO returned 24%. So you can see that by trading a leveraged ETF you can absolutely multiply your profits when you’re trading ETFs, or when you’re trading indexes, or another security through ETFs.