Exchange traded funds (ETFs) that use leverage and short-selling have the ability to reward investors with high profits, but they can also hit them hard with big losses.
They are meant for investors with a full awareness of the risks and a strong stomach, because they’re going to need them as the market roller coasters. If you’re trading them in the short-term, they can amplify gains when they’re performing the way you hope they will.
Typically, short-selling funds are for bearish investors, or types who want to hedge an existing position against losses, since they profit when the market falls, reports Dow Jones Newswires. Leveraged ETFs amplify daily index moves.
A widely traded ETF such as Financial Select Sector SPDR (XLF) gained 7% on April 1 , the first day the sector rebounded. Leveraged ProShares Ultra Financials (UYG) seeks daily returns that give twice, or 200%, the daily performance of the Dow Jones Financials Index, gaining 12.7% in one rally. But on the flip side, the UltraShort ProShares Financial (SKF) lost 13.5% that day.
Break out the antacids.
Among the other short and leveraged ETFs:
- ProShares UltraShort MSCI Emerging Markets (EEV), down 0.9% year-to-date
- Rydex Inverse 2x S&P 500 (RSW), up 10.6% year-to-date
- UltraShort Russell 2000 ProShares (TWM), up 9% year-to-date
- UltraShort Dow 30 (DXD), up 7.3% year-to-date
Read the disclosure, as Tom Lydon is a board member of Rydex Funds.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. 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.