April 14, 2012
The following video is part of our "Motley Fool Conversations" series, in which Austin Smith and Andrew Tonner discuss topics around the investing world.
In today's edition, Austin and Andrew talk about one investment trap that investors need to avoid: leveraged ETFs. Despite what seems like a straightforward way to magnify returns, their structure is fundamentally flawed to produce poor returns over the long run. Don't be fooled into thinking that a 3-times leveraged ETF will produce 3 times the return of a given index over the long run. In fact, it may very well underperform its target index. These ETFs perform worst when volatility is high. With the Vix spiking upward the past few days (though still far lower than three months ago), investors in these vehicles need to be put on watch -- they are a value-destroying trap.
Of course, these poorly designed ETFs needn't demonize what can be a valuable investment vehicle. Here are "3 ETFs Set to Soar During the Recovery." You can lean more about these great ways to profit from the upswing of emerging markets, technology, and the energy sector by clicking here.