Leveraged ETFs allow investors to enhance asset exposure without taking on a margin loan. Below we’ll review the 9 best leveraged ETFs.
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Introduction – Why Leveraged ETFs?
If you’ve landed here, you likely already know what leveraged ETFs are and how they work. Leveraged ETFs allow you to enhance investment exposure without taking on margin, and at degrees greater than what margin would allow.
Leveraged ETFs usually come in either 2x or 3x, providing 200% or 300% exposure to the daily returns of the underlying index, resetting daily. There are also inverse leveraged ETFs (-2x and -3x), allowing bears to bet on downward movement. Because of their complex nature involving swaps, debt, and daily rebalancing, leveraged ETFs are likely only appropriate for experienced investors with a high risk tolerance.
Liquidity is an important factor when choosing leveraged ETFs, as low-volume leveraged ETFs are often at risk of closure, and most investors don’t hold them long-term; they are more popular among day traders. That said, I’ve explained before why I don’t think leveraged ETFs are unsuitable for holding long-term, despite the fearmongering perpetuated in the financial blogosphere. With proper use, employing leverage can potentially enhance returns drastically (maybe even enough to beat the market), albeit obviously with a much higher risk profile, as leverage also magnifies losses. This enhanced exposure comes at a cost; leveraged ETFs usually carry high fees.
Be sure to read up on the dangers and details of using leverage before blindly buying in. Again, leveraged ETFs are better suited for experienced investors.
Below are some of the best leveraged ETFs.
The 9 Best Leveraged ETFs
Below are the 9 best leveraged ETFs to increase the risk/return profile in your portfolio.
TQQQ – ProShares UltraPro QQQ
The ProShares UltraPro QQQ ETF (TQQQ) is the most popular leveraged ETF, with over $8 billion in assets under management. The fund seeks to deliver 300% of the daily returns of the underlying NASDAQ-100 index, composed mostly of tech and communications stocks. This ETF has an expense ratio of 0.95%.
QLD – ProShares Ultra QQQ
Those seeking 2x the NASDAQ-100 instead of 3x may want to use the ProShares Ultra QQQ ETF (QLD), seeking to provide 200% returns of the underlying index before fees. This ETF has over $3 billion in assets and an expense ratio of 0.95%.
TECL – Direxion Daily Technology Bull 3X Shares
Traders looking for a pure tech play may enjoy the Direxion Daily Technology Bull 3X Shares ETF (TECL), which seeks to provide 300% of the daily returns, before fees, of the Technology Select Sector Index. The fund has over $1 billion in assets and expense ratio of 1.08%.
SSO – ProShares Ultra S&P 500
Longer-term investors will likely want a broader, more diversified index to apply leverage to. The ProShares Ultra S&P 500 ETF (SSO) seeks to deliver 2x the returns of the famous S&P 500 index. The fund has nearly $3 billion in assets and an expense ratio of 0.90%.
UPRO – ProShares UltraPro S&P 500
Those preferring to leverage 3x the S&P 500 can use the ProShares UltraPro S&P 500 ETF (UPRO). This ETF is a major component of both the Hedgefundie portfolio and my leveraged All Weather Portfolio. The fund has roughly $1.5 billion in assets and an expense ratio of 0.92%.
SPXU – ProShares UltraPro Short S&P 500
Think the market will tank soon? The ProShares UltraPro Short S&P 500 ETF (SPXU) offers 3x daily short exposure to the S&P 500 Index and carries an expense ratio of 0.91%.
TNA – Direxion Daily Small Cap Bull 3X Shares
Prefer to apply leverage to small-caps? The Direxion Daily Small Cap Bull 3X Shares ETF (TNA) provides 3x daily exposure to the Russell 2000 Index, an index comprised of 2,000 small-cap stocks. The fund has an expense ratio of 1.14%.
TMF – Direxion Daily 20-Year Treasury Bull 3X
Bonds are an important part of a diversified portfolio, especially in the context of leveraged exposure, to provide protection against black swan events. The Direxion Daily 20-Year Treasury Bull 3X ETF (TMF) seeks to provide 300% exposure to NYSE 20 Year Plus Treasury Bond Index, an index of long-term treasury bonds. TMF is another important component of the Hedgefundie portfolio, essentially to provide stock crash insurance when held alongside UPRO. The fund has an expense ratio of 1.05%.
UST – ProShares Ultra 7-10 Year Treasury
Those looking to use leverage with a lower leverage ratio and a shorter bond duration can use the ProShares Ultra 7-10 Year Treasury ETF (UST), providing 2x bull exposure to intermediate treasury bonds via the Barclays Capital U.S. 7-10 Year Treasury Index. This ETF has an expense ratio of 0.95%.
Where to Buy These Leveraged ETFs
All these leveraged ETFs are available at M1 Finance. M1 is a great choice of broker to use leveraged ETFs because they feature dynamic rebalancing of new deposits, and one-click manual rebalancing. The broker also has zero trade commissions and zero account fees, and offers fractional shares, dynamic rebalancing, and a sleek, user-friendly interface and mobile app. I wrote a comprehensive review of M1 Finance here.
Disclosures: I am long UPRO and TMF.
Disclaimer: While I love diving into investing-related data and playing around with backtests, I am in no way a certified expert. I have no formal financial education. I am not a financial advisor, portfolio manager, or accountant. This is not financial advice, investing advice, or tax advice. The information on this website is for informational and recreational purposes only. Investment products discussed (ETFs, mutual funds, etc.) are for illustrative purposes only. It is not a recommendation to buy, sell, or transact in any of the products mentioned. Do your own due diligence. Read my lengthier disclaimer here.