On the other hand, in times of increased volatility, leveraged ETF returns can fall behind their intended 2x or 3x strategies. Over the long-term or during periods of intense volatility, compounding can generate longer-term returns that are less than the sum of the individual daily returns. For example, SSO returned an average 19.7% over the past five years while the S&P 500 returned an average 11.6%.
Currently, the Chinese A-Shares market, oil swings and its effect on the energy sector, a potential Federal Reserve rate hike ahead and ongoing concerns in Europe, notably from Russia and Greece, have all contributed to short-term volatility.
Nevertheless, traders have utilized leveraged and inverse ETFs to capture areas of interest in a tactical portfolio when political or event-driven decisions may affect a market over the short-term. For instance, the ProShares UltraShort S&P500 ETF (NYSEArca: SDS), which tries to reflect the -2x or -200% daily performance of the S&P 500, and ProShares UltraPro Short S&P 500 ETF (NYSEArca: SPXU), which also takes the -300% daily performance of the S&P 500, have grown in popularity as a hedge against the so-called most hated bull market ever.
The heightened volatility may also help support gold prices and further bolster the mining sector. For instance, the Direxion Daily Gold Miners Bull 3x Shares ETF (NYSEArca: NUGT) and Direxion Daily Junior Gold Miners Index Bull 2x Shares (NYSEArca: JNUG) have been popular long bets among gold ETF traders.
While these types of leveraged and inverse ETFs may help traders capitalize on short-term moves, investors should be aware of the risks and potential divergence between these geared products and their underlying assets over the long haul and during periods of heightened volatility.
For more information on the Inverse ETFs, visit our Inverse ETF category.