Looking at the last six months in the market on our ETF Analyzer, one thing in particular becomes clear: the majority of the top-performing exchange traded funds (ETFs) year-to-date are of the leveraged and inverse variety.
Markets are up, markets are down. There’s no firm trend in the markets, resulting in increased buying and selling for investors.
In markets lacking any clear up or downtrend, it can be challenging to make profits. This goes a long way in explaining the appeal of leveraged and inverse ETFs at the moment. Outside of Treasuries and gold funds, these ETFs are among the few giving returns as other funds plummet. [The Trendless Market Survival Guide.]
The other reason leveraged and inverse ETFs are extra appealing now is because they’re simply easier to use; often you’d otherwise be trying to short stocks using margin accounts. [Leveraged ETFs Have Their Day.]
Here are a few other reasons short ETFs can be a great tool:
- ETF trades are cheaper than buying or selling options.
- Your broker won’t always be able to find shares of the stocks you’d like to short. Even if shares are available, you may end up paying substantial costs in order to borrow those shares.
- You’ll also find limits on the types of options you can use, which may restrict your ability to execute bearish options strategies. Long-short ETFs can be a good answer. [Leveraged ETFs at Center Stage.]
While leverage is great, you must use them with caution and bear in mind that they’re not for everyone. If you’re on the wrong side of a bet, your losses will be magnified. And leveraged ETFs—which use derivatives and other financial instruments to amplify the market’s daily moves—have certain quirks that can lead to unwelcome surprises for some investors. Arm yourself with information before you buy. [Our Guide to Leveraged ETFs.]
For more stories about long-short ETFs, visit our long-short category.
- Direxion Daily 10-Year Treasury Bull 3x Shares (NYSEArca: TYD)
- Direxion Daily Energy Bear 3x Shares (NYSEArca: ERY)
- ProShares UltraShort Oil & Gas (NYSEArca: DUG)
- ProShares UltraShort DJ-UBS Crude Oil (NYSEArca: SCO)
Our new ETF Analyzer allows you to sort ETFs in a variety of ways. For any ETF in any category, we always give you the option of seeing leveraged and inverse ETFs (or excluding them, if you’d rather).
Tisha Guerrero contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.