The primary purpose a trader will want to use leveraged ETFs is to amplify his or her returns. Leveraged ETFs will typically carry two or three times the returns of the index, depending on the product.
So if an index tied to a 2x leveraged ETF moves 1 percentage point, a leveraged ETF trader will earn 2 percent. If it moves 2 percentage points, the trader will earn 4 percent and so on.
The amplified return is due to a leveraged ETF using futures contracts as its underlying assets. The futures contract is an agreement to purchase or sell assets at a fixed price, but the assets are delivered at a later date.
Firms like Proshares or Direxion offer traders leveraged ETF products with a wide range of leverage and sector exposures. Furthermore, there are leveraged inverse ETF products available if a trader wishes to take a bearish point of view on a certain asset or market.
Examples of Leveraged ETFs:
- Direxion Daily Natural Gas Related Bull 3X ETF (NYSEArca: GASL)
- Direxion Daily S&P 500 Bull 2X ETF (NYSEArca: SPUU)
- ProShares UltraPro Short S&P 500 ETF (NYSEArca: SPXU)
- ProShares UltraPro 3x Short Crude Oil ETF (NYSEArca: OILD)
For more information on leveraged ETFs and how to invest in them, click the video below: