In the world of leveraged exchange traded funds (ETFs) it appears that triple the exposure will be the limit.
As more and more investors flock to leveraged ETFs because of their ability to enable one to earn bigger and bigger gains, ETF providers have said that they will not be upping the ante. Some reasons for this include design hurdles, extra costs and higher volatility, states Ian Salisbury of The Wall Street Journal.
Currently, the most leverage anyone can get is three times. This can be gained through exposure in ETFs such as the Direxion Daily Financial Bull 3x Shares (FAS), which enables one to gain triple the exposure to the financial sector. Another possibility is the Direxion Daily Energy Bull 3X Shares (ERX), which enables one to gain triple the exposure to the energy sector.
Although one has the potential to win big by utilizing these ETFs, they aren’t made for everyone and they do come with risks to be aware of. Two things to keep in mind: they are made to track their indexes on a daily basis, and they rebalance daily, which leads to tracking error over time; they are unsuitable for buy-and-hold investors, as well. The providers of these ETFs have been very transparent in explaining how these funds work and who they’re meant for. There’s no shortage of education out there, so do your research before you buy.
These ETFs do work exactly as they should, and function best as short-term hedging strategies.
Kevin Grewal 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.