Light on Leverage, Heavy on Advantages

When most investors think of leveraged exchange traded funds, they think of sexy and sometimes controversial double- and triple-leveraged funds.

The ProShares UltraPro Short QQQ ETF (NasdaqGM: SQQQ), Direxion Daily Financial Bull 3X Shares (NYSEArca: FAS) and the Direxion Daily Gold Miners Bear 3X Shares (NYSEArca: DUST) are popular examples.

In January, Direxion, the second-largest issuer of inverse and leveraged ETFs, introduced four new ways for investors to add some pep to their portfolios without the volatility associated with double- and triple-leveraged. The so-called lightly leveraged ETFs are leveraged to the tune of 1.25, not the double or triple leverage investors have become accustomed to. [A Conservative Way to ETF Leverage]

Those ETFs are the Direxion Daily S&P 500 Bull 1.25 Shares (NYSEArca: LLSP), Direxion Daily Small Cap Bull 1.25X Shares (NYSEArca: LLSC), Daily FTSE Developed Markets Bull 1.25X Shares (NYSEArca: LLDM) and the Direxion Daily FTSE Emerging Markets Bull 1.25X Shares (NYSEArca: LLEM).

These new products offer advantages, including a significant reduction in the negative effects of daily compounding over longer periods, allowing for longer holding periods for the investor. But wait. There’s more.

Direxion’s lightly leveraged ETFs have the potential to offer significant outperformance of their non-leveraged counterparts. Back-tested results provided to ETF Trends by the issuer confirm as much. Dating back to the first quarter of 1995, a 1.25 times leveraged version of the S&P 500 has outperformed the non-leveraged equivalent by almost 40 basis points per quarter, according to Direxion data.