Many investors mirror the market by investing in broad market index funds, but leveraged ETFs use derivatives to multiply the returns of an underlying index, multiplying the gains or losses. Learn what to look for in leveraged ETFs and some of the best leveraged funds to consider buying today.
There’s an old saying among investors that goes “you can’t beat the market if you become the market.” The saying relates to the idea that when investing in index funds and exchange-traded funds (ETFs), your portfolio becomes such a strong reflection of the overall stock market that it would be impossible to beat average market returns.
While that’s true for the most part, there is one way to have the potential to beat the market when investing in ETFs.
Leveraged ETFs use derivatives to increase the earnings potential of their portfolios by multiples. For example, a triple-leveraged (3x) S&P 500 ETF will use derivatives in an effort to produce three times the gains or losses generated by the S&P 500 market index.
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What to Look For In a Leveraged ETF
Investing in leveraged ETFs comes with increased risk because if the underlying assets fall, the declines will be expanded by multiples. But that hasn’t stopped traders from getting involved. After all, upward movement is also multiplied.
As with any other financial asset, these funds aren’t all created equal. The expense ratios, performance, and holdings vary wildly from one fund to the next, making it imperative to do your research before diving in. Consider these important factors when comparing leveraged funds:
Due to the expenses associated with derivatives and active trading, leveraged ETFs tend to come with high costs compared to their passively-managed counterparts.
Nonetheless, investment-grade funds have the right to set their own prices, and costs associated with these funds will vary wildly from one to the next. So, you’ll want to take the time to compare expense ratios before making an investment.
The whole point of accepting the risk associated with investing in leveraged funds is to gain exposure to assets that have the potential to beat average market returns. Unfortunately, not all funds in this category have a strong history of generating compelling returns.
When comparing funds, you’ll want to look at the returns over the past one year, three years, and five years to determine what you can expect to gain through your investment.
ETFs are only as liquid as market demand allows. Funds that are the most popular are the easiest to offload should you decide it’s time to exit your position. However, if you invest in an unpopular fund and decide it’s time to make a run for it, you could have a hard time selling your shares.
It’s best to invest in leveraged funds that have a large amount of assets under management (AUM), meaning there are lots of participants in them. These are the most popular funds around.
Any derivative investment fund is only as good as the underlying assets the fund invests in. This is especially true in leveraged funds where the returns are multiplied. As a result, it’s wise to look into the assets the fund is based upon before risking your hard-earned money on it.
Best Leveraged ETFs to Buy
Some of the best leveraged ETFs on the market today based on the criteria above include:
1. Direxion Daily Financial Bull 3X Shares (FAS)
Direxion has been providing quality investment management services since 1997, amassing a book of more than $24 billion in managed assets. When you invest with the firm, you can rest assured that your money’s in good hands.
The fund was designed to provide three times the average return of the United States financial services sector. To do so, the fund tracks the Russell 1000 Financial Services Index, which invests in the largest financial services companies in the U.S.
While the fund is focused on financial services, it is heavily diversified within the space, investing in mortgage companies, banks, credit card companies, and more.
The key stats for the fund are as follows:
- Cost: Investors in the fund pay a fee equivalent to 0.99% of their annual holdings. Although this is a higher cost structure than the average ETF — which costs about 0.44% according to The Wall Street Journal — it is in line with what you would expect to pay when investing in an active, leveraged ETF.
- Performance: The performance on the fund has been impressive to say the least. In the past year, investors in the fund have enjoyed returns of more than 250%. The past three and five years have been impressive as well, with investors generating 21.25% and 34.70% in those periods, respectively.
- Assets Under Management: All told, the FAS fund has a market cap of more than $3 billion. That’s incredibly high among leveraged ETFs, meaning that it’s an overwhelmingly popular option among investors, and liquidity will not be a concern.
- Holdings: As mentioned above, the fund is focused on generating three times the returns of the U.S. financial sector. The top holdings it uses to do so include Russell 1000 Financial Index Swaps, Goldman Sachs FX Treasury Instruments Fund (FTIXX), Berkshire Hathaway Class B Shares (BRK.B), Dreyfus Government Securities Cash Management Administrative Mutual Fund (DAPXX), and JP Morgan Chase (JPM).
As you can see, the fund comes with an acceptable price and incredible performance. At the same time, it’s overwhelmingly popular, leading to strong liquidity. With diversified holdings in the U.S. financial sector, it’s a great choice for those who are interested in using financial services stocks to beat market averages.
2. ProShares UltraPro QQQ (TQQQ)
ProShares was also founded in 1997 and quickly gained popularity over the past couple of decades. Today, the fund manager has more than $53 billion in managed assets and holds its place as a leader among leveraged ETF providers.
The fund seeks to provide three times the returns of the top 100 stocks traded on the Nasdaq by market capitalization. Considering that the Nasdaq is a tech-heavy fund, the TQQQ is a great way to gain widespread exposure to investments in technology like semiconductors, artificial intelligence, and biotechnological innovations.
Here are the key stats:
- Cost. Investors pay 0.95% of their holdings annually in order to invest in the fund. As with the vast majority of leveraged ETFs, this is higher than the average cost of a standard ETF, but in line with what you would expect from an actively managed fund. Moreover, the fund’s performance seems to justify the cost.
- Performance. The performance of the fund has been nothing to shake a stick at, with investors generating returns of more than 150% over the past year. Over the past three and five years, returns have come in at 62.59% and 72.54%, respectively.
- Assets Under Management. TQQQ is one of the most popular leveraged funds on the market today after attracting more than $12 billion from the investing community.
- Holdings. In order to generate three times the returns of the top 100 companies on the Nasdaq, the fund’s holdings are tech heavy. The top six holdings in the fund are all Nasdaq 100 index swaps offered by different providers. The fund also invests heavily in Apple (AAPL), Microsoft (MSFT), and Amazon (AMZN).
Considering its heavy tilt toward the technology sector, this fund is a great option for investors who are interested in beating the market with investments in technology and medicine. The fund offers a reasonable cost structure and is known for producing compelling performance.
3. Direxion Daily Technology Bull 3X Shares ETF (TECL)
With Direxion being one of the largest providers of leveraged ETFs, it only makes sense that you’ll find the firm on this list a few times. This particular fund, the Technology Bull 3X Shares ETF, is another attractive option for technology investors.
The fund was designed to provide three times the returns of the Technology Select Sector Index, which tracks companies in various corners of the technology sector. Some of the largest investments in the fund are in computers, software, telecommunications services, semiconductors, and IT services.
Here are the key stats:
- Cost. Investors will pay a 1.01% expense ratio in order to take part in the TECL fund. Although it’s not the lowest fee structure on this list, the expenses associated with the fund are in line with other actively managed funds.
- Performance. Over the past year, investors have earned a whopping 140% return on their investments. In the past three and five years, the fund has generated returns of 61.64% and 72.98%, respectively.
- Assets Under Management. To date, the fund has attracted more than $2.5 billion in assets from the investing community. While it’s not the largest fund on this list by any means, there is plenty of interest to avoid any liquidity-related concerns.
- Holdings. The fund is tilted heavily toward the technology industry. The largest holdings in the fund include Technology Select Sector Index Swaps, Apple (AAPL), Microsoft (MSFT), Dreyfus Government Securities Cash Management Administrative Mutual Fund (DAPXX), and Goldman Sachs FX Treasury Instruments Fund (FTIXX).
With such a heavy focus on technology, those who are interested in the tech sector and willing to take on a high-risk investment in return for the potential for significantly outsize returns will benefit greatly from investing in this fund.
4. ProShares UltraPro S&P500 Fund (UPRO)
Managed by ProShares, you can rest assured that any money you invest in the ProShares UltraPro S&P500 Fund is in good hands.
As its name suggests, the fund is centered around the S&P 500 market index, one of the largest representations of the U.S. market out there today. As a leveraged fund, its goal is to generate three times the returns of the S&P 500. The holdings of the underlying index are highly diversified, spanning nearly every sector of the U.S. market.
Here are the key stats:
- Cost. With an expense ratio of 0.93%, the fund has a higher cost than the average ETF. But among leveraged options, the cost is on the lower side, allowing you to hold onto more of your gains.
- Performance. Over the past year, investors have enjoyed returns of more than 155%, with the three- and five-year returns coming in at 34.76% and 38.96%, respectively.
- Assets Under Management. Since inception, the fund has attracted more than $2.5 billion from the investing community.
- Holdings. With the underlying index being the S&P 500, the fund offers diversified exposure to the entire U.S. market. The largest holdings in the fund are S&P 500 index swaps, with no single stock taking a significant share of the fund’s portfolio value.
With a low expense ratio and solid performance, it’s impossible to discount the validity of this fund as an investment. Moreover, the fund is highly diversified, making it the perfect option for investors who don’t want their portfolio overexposed to one sector or another.
5. ProShares Ultra S&P500 Fund (SSO)
As its name suggests, this leveraged fund from ProShares is another fund that’s based broadly on the S&P 500 index. It is a popular option among investors who are interested in beating average market returns, but it offers a lower risk profile because it seeks to double the returns of the index rather than triple them.
Sure, that may cut into overall earnings on the upside, but it also greatly reduces drawdown risk.
Here are the key stats:
- Cost. The fund comes with an annual cost of 0.91% — higher than the average passively managed ETF, but on the low end of the spectrum for leveraged options.
- Performance. Because this is a 2x fund rather than a 3x fund, its performance has historically been lower than the other funds mentioned above, but the drawdowns have also been significantly lower. And its investors are by no means upset with the performance — over the past year, the fund has generated more than 91% gains, with returns over the past three and five years clocking in at 29.55% and 29.82%, respectively.
- Assets Under Management. With more than $4 billion in managed assets, the fund has no issues with popularity, meaning that when you’re ready to sell your positions, you won’t have any problems finding a buyer.
- Holdings. As with the UPRO fund, the vast majority of holdings in the fund are S&P 500 index swaps with no significant holdings in any single stock.
All told, the SSO fund is a great option for investors who want to take advantage of leverage but aren’t comfortable with 3x leveraged funds due to the significant drawdown risk. Investors in the fund have enjoyed meaningful returns, low fees relative to other leveraged options, and a highly diversified portfolio that protects against declines in any specific domestic sector.
6. Direxion Small Cap Bull 3X Shares ETF (TNA)
Direxion’s Small Cap Bull 3X ETF is a popular option among investors due to its leveraged exposure to small-cap stocks. Historically, smaller companies have been known to outperform their large-cap counterparts in the long run, making them a great option for investors looking to beat the market. By adding leverage, the potential for market-leading gains is only expanded.
The fund seeks to generate three times the performance of the Russell 2000 index. This means investors gain widespread, leveraged exposure to domestic stocks with small market caps.
Here are the key stats:
- Cost. The annual cost of the fund comes in at 1.11%, which is on the higher side when compared to others on this list. Nonetheless, with a heavy tilt toward small stocks and 3x leverage, the increased expense can be made up for in its performance.
- Performance. Although the three-year performance on the fund isn’t going to turn any heads at just a 6.33% gain, the one- and five-year performance has been impressive. Over the past year, investors have earned more than a 257% return on their investment, with the five-year return currently sitting at 25.71%.
- Assets Under Management. Since inception, the TNA fund has attracted more than $1.7 billion from the investing community. Sure, it’s not the largest fund on the list, but it’s definitely popular enough to alleviate any liquidity concerns.
- Holdings. The fund only has six holdings in its portfolio. They include the iShares Russell 2000 ETF (IWM), Russell 2000 Index Small Cap Swaps, Dreyfus Government Securities Cash Management Administrative Mutual Fund (DAPXX), Goldman Sachs FX Treasury Instruments Fund (FTIXX), and the Goldman Sachs Square Treasury Instruments Fund.
While its expenses are slightly higher than other options on this list, the strong performance of this fund over the past year has been eye-opening. This combined with a heavy tilt toward small companies with a strong probability of performance makes the TNA fund one that’s hard to ignore.
7. Direxion Daily S&P500 Bull 3X Shares (SPXL)
Direxion takes another spot on the list with the SPXLfund designed to generate three times the returns of the S&P 500 index.
With a focus on the S&P 500 as a whole, investors looking for leverage with heavy sector diversification among domestic stocks will find the fund appealing. Here are the key stats:
- Cost. The fund charges 1.01% of your annual holdings. It’s not the lowest cost fund on the list, but it’s not the highest either, and its historical returns have been impressive to say the least.
- Performance. Over the past year, investors have enjoyed returns of more than 155%, with the returns in the past three and five years coming in at 34.71% and 38.78%, respectively.
- Assets Under Management. To date, the fund has attracted more than $2.4 billion from the investing community.
- Holdings. Although the fund provides diversified, leveraged exposure to the broad U.S. market, it only invests in five assets. They include the iShares Core S&P 500 ETF (IVV), Dreyfus Government Securities Cash Management Administrative Mutual Fund (DAPXX), S&P 500 Index Swaps, Goldman Sachs FX Treasury Instruments Fund (FTIXX), and the Goldman Sachs Square Treasury Instruments Fund.
All in all, if you’d like diversified exposure to a wide range of domestic sectors and market capitalizations and want to take advantage of leverage in the market, this fund is a great way to go. With reasonable fees and head-turning returns, the fund is one worth strong consideration.
8. ProShares Ultra 7-10 Year Treasury Fund (UST)
Until this point, all the funds on this list have addressed leveraged exposure to equities. However, any balanced portfolio includes fixed-income holdings as well, even if that portfolio is a leveraged one.
That’s where the ProShares Ultra 7-10 Year Treasury Fund comes in. The fund seeks to produce double the returns of intermediate-term Treasury debt securities with maturities ranging from seven to 10 years.
Here are the key stats:
- Cost. The annual cost associated with the UST fund is 0.95%, which is in line with other actively managed funds.
- Performance. Recently, the fund’s performance hasn’t been the best thanks to the ultra-low interest rate environment that’s holding down returns on bonds. Over the past year, investors have lost 9.38%. However, over the past three and five years, the fund has generated returns of 9.35% and 2.21%, respectively. While these returns are low compared to leveraged funds centered around equities, the fund does provide stability in a leveraged portfolio, helping to minimize drawdown risk.
- Assets Under Management. With only $18.79 million in managed assets, the UST fund is not as widely traded as others on this list. However, leveraged bond funds aren’t generally popular options because investors seeking leveraged funds aren’t always concerned about safety. Among this style of fund, though, UST is one of the most popular.
- Holdings. The fund only has three holdings, all of which are in Treasury debt securities. These include two different U.S. Treasury index swaps and U.S. Treasury Notes.
All in all, most investors wouldn’t want to touch a leveraged bond fund. However, if you’re interested in leverage in your portfolio, it’s a great way to reduce risk. Although returns have been low the past few years as a result of a low-interest-rate environment, in terms of leveraged bond funds, UST is one of the best in the business.
9. Direxion Daily 20+ Year Treasury Bull 3X ETF (TMF)
This bond fund focuses on 20+ year Treasury debt securities. The fund was designed to triple the results of the average Treasury bond with a maturity over 20 years.
Like other leveraged bond funds, TMF has struggled over the past few years due to the low-interest-rate environment. However, it acts as a great hedge against drawdown risk in a leveraged portfolio.
- Cost. The fund comes with an annual cost of 1.06% of your investment, making it one of the higher-expense funds on this list. Nonetheless, it’s one of the better performing leveraged bond funds on the market today.
- Performance. Persistently low interest rates have been a painful reality for investors in this fund, but these depressed rates don’t last forever. When rates eventually rise, this fund’s performance is expected to improve. Nonetheless, investors have lost 33.56% over the past year. The fund has generated gains of 12.53% in the past three years and losses of 0.38% over the past five years.
- Assets Under Management. In terms of leveraged bond funds, TMF is a very popular choice. It has attracted more than $286 million from investors.
- Holdings. The fund is a relatively simple one to follow, only investing in four assets. These are the iShares 20+ Year Bond ETF (TLT), Goldman Sachs FX Treasury Instruments Fund (FTIXX), Dreyfus Government Securities Cash Management Administrative Mutual Fund (DAPXX), and iShares 20+ Year Treasury Bond ETF Swaps.
While performance over the past few years hasn’t been impressive, hedging your equity bets with fixed-income securities is a great way to reduce overall risk, especially when managing a leveraged portfolio. The TMF is a compelling option for doing just that.
10. Direxion Daily Retail Bull 3X Shares ETF (RETL)
The RETL fund is designed for those who want exposure to retail in a leveraged portfolio. The fund was built to provide three times the returns of the S&P Retail Select Industry Index, a measure of the retail sector of the S&P 500.
Here are the key stats:
- Cost. Investors in the fund pay 1% annually to take part. This may not be the lowest cost on the list, but the compelling performance it offers makes the 1% fee look like chump change.
- Performance. Over the past year, investors have earned more than a 730% return in this fund. Over the past three and five years, returns have been 43.78% and 26.57%, respectively.
- Assets Under Management. The RETL fund isn’t the most popular fund on this list by any means, only attracting about $151 million from the investing community to date. Nonetheless, there is enough volume on the fund to alleviate any liquidity concerns.
- Holdings. The fund focuses its investments on the retail sector with the goal of tripling its returns. The top five holdings in the fund include S&P Retail Select Industry Index Swaps, Dreyfus Government Securities Cash Management Administrative Mutual Fund (DAPXX), Goldman Sachs FX Treasury Instruments Fund (FTIXX), Goldman Sachs FS Government Institutional Fund (FGTXX), and Etsy Inc (ETSY).
Be Cautious When Using Leverage
Beginner investors often see the increased earnings potential leverage has to offer — whether it be on ETFs or individual stocks — and decide to dive in without considering the risk. Sure, the increased earnings potential is incredible, but the downside can be incredibly painful.
Any fund that’s designed to multiply the returns of an underlying benchmark does just that on both the upside and the downside. Although stocks have been rallying for most of the past several years and returns have been great, bull markets don’t last forever. When declines start to take place, leveraged investments magnify the losses.
For example, let’s say you invest $1,000 in a triple-leveraged ETF based on the S&P 500. Should the index climb by 1% in a single day, your single-day earnings will be about $30. On the other hand, if the index were to fall by 1% in the trading session, your losses would be about $30 — leaving you with only $970 to begin the next day. A string of down days can easily wipe out much of your buying power with frightening speed.
Because of the extreme risk involved in these investments, they’re best left to those with plenty of experience in the stock market. If you’re a newcomer, you should avoid leverage like the plague.
With the potential to greatly outpace the returns of the overall market, leveraged funds have become a hot commodity. However, it’s important to keep in mind that these funds come with significant short-term volatility and are best used by those with a high risk tolerance.
As with any investment, it’s important to do your research before choosing a fund to invest in. When researching leveraged funds, pay close attention to the cost, past returns, holdings, and popularity of the fund to make sure it fits in well with your needs.