The leveraged exchange traded fund (ETF) has been one of the industry’s greatest success stories-for some. These ETFs are designed to make big bets on the direction of the stock market, and over 50 have launched during the past year with $6 billion in assets. Some leveraged funds seek to double the performance of a market index, while others seek the inverse, falling when the index rises. Diya Gullapalli and Ian Salisbury of The Wall Street Journal report some recent research suggests the funds performance does well within the guidelines. But investors who don’t trade at certain times of the day or who hold the fund one day too long, may not get returns they anticipated.
The essence of leveraged funds and their returns have to do with the effects of compounding gains or losses. The math behind compounding can help, hurt or be irrelevant. The key is how they are implemented into your investment strategy and when and where they will be used. As the Wall Street Journal article implies, buying and holding a leveraged ETF may have little positive impact over time.
This type of investment may not be for every investor and one needs to know and understand exactly what they are buying before adding it to a portfolio. While it is extraordinary, leveraged ETFs offer individual investors the opportunity to invest in ways they might not have before. It doesn’t mean they are for everyone. Education is important.
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.