A strong bull market without long interruptions and relative low volatility helped maintain positive gains in the leveraged ETF. Since the ETFs rebalance on a daily basis, the compounding effect benefits leveraged ETFs in a upward-trending market. In an upward-trending market, compounding can generate longer-term returns that are greater than the sum of the individual daily returns. Similarly, in a downward-trending market, compounding can generate longer-term returns that are less negative than the sum of the individual daily returns.
However, leveraged ETF investors should not grow too complacent when holding on to these geared products for extended periods as a sudden risk-off even could abruptly whack investors on the downside or quickly erode the recent gains.
“Good leveraged ETF users will take some earnings off the table or even take all earnings off the table to rebalance their positions,” O’Rourke advised.
While trending markets may offer an opportunity to hold leveraged ETFs for longer periods of time to seek gains, users should still be aware of the risks involved with a highly leveraged position and consider trimming some of their recent gains to rebalance a leveraged position back to their initial weights.
For more information on geared products, visit our leveraged ETFs category.