Traders that have a short-term trading strategy will benefit the most from these types of funds. By using the funds to capitalize on daily movements in the market or a specific sector, the ultra ETFs give leverage to a portfolio. Most traders that use these funds are knowledgeable and get in and out within one day.
One example of a leveraged bullish ETF is the ProShares Ultra S&P 500 (NYSEArca: SSO), which was designed to give double the performance of the Standard & Poor 500 index on a daily basis. In theory, if the S&P 500 gained 1% during a trading day, SSO would be up 2%, reports Mark Cison for Investopedia. [How to Use Leveraged and Inverse ETFs]
“The mathematics of compound interest make volatility a hidden cost to these funds beyond the already high expense ratios. The SEC is examining the need for additional investor protections for leveraged and inverse ETFs and had put a temporary halt to the issuance of new derivatives based ETFs. In addition, FINRA has cautioned its broker members on the sale of leveraged ETFs,” explained Rawson on Morningstar.
Tisha Guerrero contributed to this article.