Leveraged exchange-traded funds (ETFs) allow investors to achieve outsized returns. Unfortunately, those outsized returns can be in either the positive or negative direction. That's why it's important to understand exactly what a leveraged ETF is and the different options that are available.
Todd Shriber of Investing Answers describes leveraged ETFs as controversial trading instruments. Although these types of investments are very popular among investing professionals, experts criticize them as too complicated for the retail investor.
The controversy stems over the fact that these types of ETFs do not typically go long or short on stocks. Rather, they use options, swaps and derivatives to achieve their performance goals.
Due to the nature of leveraged ETFs, they tend to have relatively high expense ratios, which eat into returns. "In fact, there are documented examples on the SEC web site of a leveraged ETF that produced negative returns even when the index it tracks moved up." You can read more about leveraged ETFs and other types of ETFs on Education Central.
Those who have improperly used leveraged ETFs may have gotten burned in the past, but these funds are very useful when used properly. However, if you're not good at monitoring your investments and don't know when to buy and sell, these ETFs may not be for you, says The Toronto Globe & Mail.
On the flip side, leveraged ETFs are a great way to amp up returns in the short run- that is, if you know what you are doing. But if you're willing to take on the added risk and you understand these products, then you may want to take a look at these ETFs. [Leveraged ETFs Have Their Day.]
Direxion Daily Financial Bull 3X Shares (NYSE: FAS ) & Direxion Daily Financial Bear 3x Shares (NYSE: FAZ )
These ETFs track the Wilshire 1000 Financial Services Index. FAS and FAZ have expense ratios of 0.85% and 0.95%, respectively. Together, they have an average daily trading volume of about 77 million shares.
ProShares Ultra Oil & Gas (NYSE: DIG ) & ProShares UltraShort Oil & Gas ETF (NYSE: DUG )
These ETFs track the Dow Jones U.S. Oil & Gas Index. They are double leveraged ETFs with expense ratios of 0.95%. The high volatility in this sector can give investors 10-15% returns in a week.
ProShares Ultra Basic Materials (NYSE: UYM ) & ProShares UltraShort Basic Materials ETF (NYSE: SMN )
If you have the stomach for risk, then a leveraged ETF in the materials sector can potentially take you for the ride of your life.
ProShares Ultra Semiconductors ProShares (NYSE: USD ) & ProShares UltraShort Semiconductor (NYSE: SSG )
Finally, if you are bullish on the tech sector, then you may want a hand in these leveraged ETFs. The tech sector is not as volatile as the energy or materials sector. In addition, USD is one of the few leveraged ETFs that actually has positions in the relevant stocks it follows.
These are just a sample of the types of leveraged ETFs you can invest in. Remember, if you decide to play your hand in these types of funds, invest with caution. [All About Leveraged ETFs.]
You can find leveraged and inverse ETFs by using our ETF Analyzer and selecting which type of ETF you'd like to see from our drop-down menu.
For more information on long and short ETFs, visit our long-short category.
ETFTrends
Sumin Kim contributed to this article.
Guest contributor Tom Lydon is President of Global Trends Investments, a Registered Investment Advisor. Global Trends Investments and its clients are not subject to the Fool's trading policy, and thus may currently own or trade in, on behalf of its clients, long or short positions in any ETF mentioned in this article.
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