John Bogle, the founder of The Vanguard Group, once said the "winning formula for success in investing is owning the entire stock market through an index fund" since most professional fund managers couldn't beat the market over the long term. So instead of actively trading stocks, most investors should simply invest in a low-cost index fund that tracks the S&P 500 -- which has delivered an average annual return of 10% since its inception in 1957 -- and let it run.
Bogle passed away in 2019, but the Vanguard S&P 500 Index Fund (VFIAX) and Vanguard S&P 500 ETF (VOO 0.02%) remain popular investments for long-term investors. However, there are still plenty of ETFs that are trying to beat the S&P 500 with total return swaps, futures, options, and other derivatives.
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One of those ETFs is the Direxion Daily S&P 500 Bull 3X Shares (SPXL 0.17%), a triple-leveraged ETF that aims to triple the daily performance of the S&P 500 (before its fees and expenses). Let's review the three reasons to buy this aggressive ETF -- and the three reasons to avoid it.
The three reasons to buy SPXL
SPXL might be an attractive investment for three reasons. First, SPXL could be a great way for short-term investors to rack up some quick daily gains. Second, it triples the S&P 500's daily performance with total return swaps and other derivatives. By bundling all that leverage, it becomes an attractive play for traders who don't want to take on margin. Third, SPXL has a daily trading volume of nearly 6.2 million shares as of this writing, which is comparable to the Vanguard S&P 500 ETF's trading volume. That liquidity should make it appealing to day and swing traders who need to quickly enter and exit their positions.
The three reasons to avoid SPXL
Three issues could make SPXL a bad investment. First, it only tracks the S&P 500 on a daily basis instead of a cumulative basis because it resets its swaps every day. Second, it also triples the S&P 500's daily losses. So while SPXL might outperform the S&P 500 over a few days, a single market downturn could wipe out those gains.
Those compounding effects can stack up faster in volatile markets. Even if the S&P 500 is flat for a day, SPXL's swaps, futures, and derivatives could erode its value. That "volatility drag" makes it a bad pick for long-term investors. That's why SPXL merely matched the S&P 500's 12% gain over the past 12 months instead of tripling its return.
Last but not least, SPXL charges a high net expense ratio of 0.87%. Vanguard's S&P 500 ETF has a much lower expense ratio of 0.03%. So, unless you're trying to make a fast profit, it doesn't make much sense to touch this highly leveraged ETF.
Bogle wouldn't approve of SPXL
Bogle once said that "what may work for the few cannot work for the many" -- and he also warned that "speculation has no place in the portfolio or the kit of the typical investor." During a Forbes interview back in 2013, Bogle said leveraged ETFs like SPXL -- which try to double or triple the market's return with leverage -- were simply created as "gambling" tools, concluding, "What sense that makes is beyond my comprehension."
So, as a long-term investor who admires people like Bogle, Warren Buffett, and Peter Lynch, I'd personally never touch leveraged ETFs like SPXL. These ETFs have been gaining a lot of attention on social media channels recently, but they're incredibly risky investments that could burn inexperienced investors.
