The Hidden Dangers of Leveraged ETFs: Why Leveraged ETFs Are Not a Long-Term Bet – Part 4

Published on November 4, 2021

Popular YouTube videos top searched good Penny Stocks, Make Good Money With Penny Stocks, Pennies Stocks, and Is Dfen A Buy, The Hidden Dangers of Leveraged ETFs: Why Leveraged ETFs Are Not a Long-Term Bet – Part 4.

Leveraged ETFs – Opportunities, Risks and Dangers. PLEASE LIKE AND SHARE THIS VIDEO SO WE CAN DO MORE! How risky are leveraged exchange traded funds? These instruments are only for day trading or holding positions for a few days at most. When buying into a leveraged ETF not only are there trading costs but in some cases you also have the interest expense of the debt used to achieve the actual leverage.

But why are leveraged ETFs dangerous? The issue with leveraged ETFS is that you can end up losing all your money while waiting for the ETF to move in your direction. Let’s suppose that over 50 trading days, half of those days the index you’re tracking moves up by 5%, and half of those days it moves down by 5%. If you are investing in a normal unleveraged exchange traded fund, at the end of that time you will still have 93.9% of your capital. As such, you can absord that and wait till it reverses.

But if you’re in a 3x leveraged ETF, on down days your ETF will go down by 15%. On positive days it will go up by 15%. One up-down cycle and you end up with 2.25% less of your capital. (1.15*0.85=0.9775.). Two up-down cycles, and you have lost 4.45%. After the 50 days period only 56.6% of your capital remains. Can you really recover?

That’s the big issue – if an index doesn’t go anywhere and is range-bound, the leveraged ETF will end up underwater. And of course if the index moves in the opposite direction to your ‘bet’, you could end up getting wiped out rapidly. As such you only win if a move up happens swiftly…

So, that’s the big problem: if an index treads water, the leveraged version will lose money. And of course, if the index goes down substantially, as it could in a bear market, you could get quickly wiped out. Basically, you only win if a move up happens quickly, which I assure you is not always the case.

So is a 3x ETF a bad investment?

If you get the direction right, it’s a good investment. Due to the derivatives used in the composition of the ETF, they tend to under perform their leverage number. IOW, a 3x ETF might return 2.25 or 2.5 or 2,75 times the underlying index but that’s still significantly better than a 1x ETF. There’s also the issue of beta decay.

In terms of achieving the leverage return, 2x and 3x leveraged ETFs are effective for short term trading. Just remember that leverage is a double (or triple edged) sword. If you can make 3X if right, you can lose 3X if wrong.

In this series:
ETFs, What is An Exchange Traded Fund? Part 1 🙌

Main ETFs to Trade Part 2 👍👌

What are Inverse ETFs? What are Leveraged ETFs? Part 3 🙌👍

The Hidden Dangers of Leveraged ETFs: Why Leveraged ETFs Are Not a Long-Term Bet – Part 4

Is Dfen A Buy

Is Dfen A Buy, The Hidden Dangers of Leveraged ETFs: Why Leveraged ETFs Are Not a Long-Term Bet – Part 4.

How To Pick The Finest Penny Stocks Newsletter

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