Ups and Downs with Leveraged ETFs

While we know exchange traded funds (ETFs) are popular and expedient investment tools, some come with a twist to make investing more exciting. These renegade ETFs are known as leveraged funds. The leveraged ETF will increase the exposure and impact from the underlying index, such as attempting to double the return of an index on a daily basis, reports Matthew McCall for Forbes Investopedia.

ProShares introduced the first family of leveraged ETFs in June 2006. The Ultra ProShares ETFs are designed to double the daily performance of the index in which they track. ProShares uses a bevy of strategies to generate magnified returns. Some advantages of leveraged ETFs include:

• Provide an easy and inexpensive way to leverage without options or margin
• Available in retirement accounts
• Because the goal is to double "daily" return, it can be a good tool for short-term traders

Some of the drawbacks to these ETFs include:

• Negative compounding can impact long-term performance – the key word is "daily" return, not "long-term" return
• Low trading volume leads to low liquidity
• High risk is associated with these funds and can be dangerous to an uneducated investor