The goal of every investor is to have their portfolio outperform the average market returns. However, sticking to only index funds and the regular exchange-traded funds (ETFs) makes it more difficult to achieve this goal.
On the other hand, leveraged ETFs are a more suitable tool, with the potentials to increase portfolio returns by multiples. In this article, I discussed leveraged ETFs extensively, and more importantly, provided a list of the best leveraged ETFs to transform your portfolio.
Key Takeaways
- Leveraged ETFs use debt and derivatives to multiply the returns of the index or asset class they are tracking.
- Leveraged ETFs can push your portfolio to outperform the overall stock market by multiplying your potential earnings.
- If they fall behind the general market performance, they can also drag your portfolio down by multiplying your potential losses.
- Most leveraged ETFs have a 1% (or higher) expense ratio.
- The best-leveraged ETFs are UST, TECL, TQQQ, TMF, TNA, SSO, and UPRO.
- Consider the leverage, expense ratio and fees, trading value, and performance when choosing the right leveraged ETFs for your portfolio.
Introduction to Leveraged ETFs
You need no introduction to ETFs, but let’s quickly dive into the world of leveraged ETFs. Leveraged ETFs hold mainly debt and financial derivatives to increase the returns on the index they are tracking, and by extension, the potential earnings of their portfolios by multiples.
These exchange-traded funds are somewhat more complex and powerful than regular funds, and this is why they offer magnified returns (or losses) on investments. But are they different from the non-leveraged ETFs? Yes, they are.
Recall that non-leveraged ETFs focus mainly on leveraged shareholder equity, in addition to tracking an underlying index or asset class. Also, regular ETFs aim to match the performance of that index or assets they are tracking.
In contrast, leveraged ETFs target returns in multiples of the performance of the asset class or index they are tracking, leading to returns higher than the cost of assuming the debt. For instance, an S&P 500 ETF with 5x leverage may use financial derivatives (like options and contracts) to arrive at 5x the gains (or losses) of an S&P 500 market index.
Investors who want their portfolio to outperform the general stock market favor leveraged ETFs. Depending on your risk tolerance levels, you can opt for leveraged ETFs designed to achieve 0.5x, 1x, 2x, or 3x the index’s daily performance. There are also inverse leveraged ETFs that multiply the daily performance of an asset class or index in the opposite direction (-1x, -2x, or -3x).
Just before I reveal my list of the best-leveraged ETFs to add to your portfolio, let’s put some new perspectives on this discussion by highlighting the advantages and disadvantages of leveraged ETFs.
Pros and Cons of Leveraged ETFs
You can expect leveraged ETFs to fetch you outsized returns and hedge against possible losses, considering their returns come in every day. However, this also puts you at the risk of steep losses within a short period. In fact, you can lose most (or all) of your ETFs’ value in just a day.
If you favor derivatives contracts, leveraged ETFs will give your portfolio some exposure and potentially higher returns. But you should also note that focusing on derivatives means they cannot efficiently track their underlying asset or index. Also, while the shares of leveraged ETFs are openly traded, only a few are heavily traded. Therefore, you may face challenges buying or selling shares in a leveraged fund.
Even though there is a close correlation in the daily returns, leveraged ETFs hardly mirror the daily returns of their underlying asset or index in the long run. And you should be ready for the relatively higher expense ratios (1% or higher) of most leveraged ETFs.
7 Best Leveraged ETFs To Buy
You are most likely here to find out the best leveraged ETFs to buy, and that is understandable. After all, the hallmarks of every investor is careful market research and analyses to arrive at the very best options.
Now, let’s get to my leveraged ETFs list.
The first entry on my list is the ProShares Ultra 7-10 Year Treasury Fund (UST). It is a 2x leveraged ETF with fixed-income holdings looking to double the returns of intermediate-term Treasury debt security, with remaining maturities between 7 and 10 years.
UST has 20 total holdings worth over 20 million, with a 0.95% expense ratio and an MSCI ESG Fund Rating of 6.10/10. It is conservatively traded because only a few investors want to add a leveraged bond fund to their portfolio. However, it can help you reduce risk with its minimal impact on investors’ exposure.
Here is another leveraged ETF offering 3x the daily earnings of the S&P 500. A 1% daily increase in the S&P 500 value equals a 3% increase in the UPRO value. The same rate of decrease happens in the event of a drop in the S&P 500 fund value.
The ProShares UltraPro S&P500 Fund (UPRO) has performed solidly so far. Its expense ratio is 0.91%, with over 500 assets worth over 3 billion in its holdings. If you want decent exposure to a market-cap-weighted index of the most well-known firms in the world, this is an excellent choice for your portfolio.
Find out more about UPRO on the issuer’s website.
3. Direxion Daily 20+ Year Treasury Bull 3X ETF (TMF)
As the name suggests, TMF invests in 20+ year treasury debt securities and aims to 3x the returns of the average Treasury bond with 20+ years maturity. So, if you are looking for a 300% exposure to NYSE 20+ years Treasury Bond Index, TMF is one of your best options out there.
You can also combine this non-diversified fund with UPRO to give your portfolio considerable stock crash insurance. The expense ratio of Direxion Daily 20+ Year Treasury Bull 3X ETF (TMF) currently stands at 1.06%, and it holds presently six assets worth about $400 million.
ProShares UltraPro QQQ (TQQQ) is another 3x leveraged ETF offering daily exposure to NASDAQ-100 stocks. The underlying index of TQQQ comprises 100 of the biggest non-financial NASDAQ stocks (according to market capitalization), including tech companies that are into artificial intelligence, semiconductors, and others.
TQQQ’s total holdings (117) are worth over 18 billion, with an expense ratio of 0.95%. So, if you are looking to expose your portfolio to investments in medicine and technology like Amazon, Apple, and Microsoft, TQQQ is one of the most popular leveraged ETFs offering that.
You can expose your portfolio to about 2000 US small-cap stocks (Russell 2000) with Direxion’s Small Cap Bull 3X ETF. This will be a logical call considering the smaller companies’ (market cap) track record of outperforming the bigger guys.
TNA aims to generate 3x the Russel 2000 index performance for one day at a time. There are currently seven (7) holdings in its books, worth over $1.6 billion. Its expense ratio is 1.11%, with an MSCI ESG Fund Rating of 5.21 out of 10 and an overall strong track performance.
The ProShares Ultra S&P 500 ETF aims to double the daily return of the S&P 500 index. Moreover, at just 2x leverage, the risk profile is relatively lower. It is an ideal choice for conservative investors.
SSO’s diversified portfolio focuses on the S&P 500 index swaps. It has over $4 billion in managed assets, with an expense ratio of just 0.91. The MSCI ESG Fund Rating of SSO is 6.17/10, indicating a fair resilience against long-term risks associated with environmental, social, and governance factors.
The fees are relatively low, and the returns have been tangible so far.
The last entry on my leveraged ETF list is the Direxion Daily Technology Bull 3X Shares (TECL). If you prioritize exposure to tech, you can get triple-daily long leverage to the Technology Select Sector Index with TECL. As shown in its track records, this ETF offers significant interests, helping you avoid any liquidity-related issues.
The total net assets in TECL’s holdings are worth well over $3 billion. The expense ratio is 0.95%, with a 376% turnover rate and an MSCI ESG rating of 6.31/10. It is offered by Direxion, one of the world’s most popular ETF leveraged providers.
How to Invest in Leveraged ETFs
You need a considerable level of financial knowledge and engagement to invest in leveraged ETFs. Assess your comfort level and determine how much of your investment balance is going into your chosen leveraged ETFs. Always start small and have effective exit strategies in place.
You can get these best-leveraged ETFs on my list at any major broker.
Final Verdict
Let me reiterate that leveraged ETFs are short-term investment vehicles. And while you can hold them for long periods, it is best to focus on the impressive short-term returns they offer. The slightest decline in economy or a minimal market shakeup can force leveraged ETFs to lose significant value, thus amplifying your losses.
If you are a new or beginner investor, it is safer and better to stick to the regular ETFs. That way, you can nurture your portfolio gradually and consistently without putting it at the risk of magnified losses associated with leveraged ETFs. On the other hand, expert investors will find leveraged ETFs quite rewarding if their risk tolerance levels permit.