8 Best Leveraged ETFs to Trade in 2022

What are Leveraged ETFs?

Leveraged ETFs are powerful but complicated trading or investment tools that facilitate investors to magnify the return on investment. Increased returns are attractive, but investors should remember that losses can be magnified too. Therefore, inverse or leveraged ETFs should be handled with care.

Traditional ETFs offer exposure to different sectors, index funds, foreign markets and more.  While leveraged ETFs can offer that same diversification with two to three times the leverage or returns. For instance, a three times leveraged ETF providing exposure to the S&P 500 will obtain 9% while the S&P 500 gains 3% and vice versa if it declines.

The main downside with these leveraged vehicles is the risk of decay from long-term holding. If you hold a leveraged ETF for an extended period, the results would be unpredictable because of volatility decay and compounding. 

ProShares Ultra Pro Short QQQ (TQQQ)

It is one of the most popular and liquid leveraged ETFs present in the market. It has a 170 million shares average volume and a small 30-day median bid-ask spread of around 0.4%. However, like almost all other ETFs, TQQQ is not a cheap token. It can cost you a ratio of 0.95% of annual expenses.

Proshares ultra pro TQQQ provides traders daily three-time exposure to the Nasdaq-100 index. It is an already dominated index by the mega-cap tech stocks, turning it into an even more volatile index.

Proshares ultra TQQQ leverage ETF offers even greater exposure by applying leverage three times to the Nasdaq-100 index while utilizing swap derivatives. However, the observed intraday swings of around 10% in both directions are not surprising or unusual.

ProShares Ultra QQQ (QLD)

It is a less popular fund in the stock market, but still, it is highly liquid, with an average trading volume of around 7.5 million shares. It has a smaller 30-day median bid-ask spread of only 0.2 percent. Despite being a low leveraged fund, this QLD fund still charges the same expense ratio as TQQQ and charges around 0.95%.

Proshares ultra QLD is a low leveraged version of TQQQ, which provides two-time daily leveraged exposure for investors to the Nasdaq-100 index. Comparatively, less exposure makes the QLD less volatile than TQQQ but riskier than other non-leveraged funds.

QLD's lower amount for leveraged can also result in less volatile decay if held for a longer period than a day. However, like with all leveraged funds, this is not suggested. Investors willing to get minimal risk should consider QLD instead of Proshares ultra TQQQ. It is less leveraged and less risky.

Direxion Daily S&P 500 Bull 3x Shares (SPXL)

Investors and traders wishing to have a more broad-based index than the Nasdaq-100 are suggested to consider leverage exchange-traded funds such as SPXL. Direxion Daily S&P 500 bull 3x shares offer daily exposure to the more liquid and larger index such as S&P 500. Compared to Nasdaq-100, this index provides more diversified exposure to a wide range of market stock sectors.

Half of the Nasdaq-100 index is obtained by technology firms, and only 28% of the S & P 500 comprises technology sectors, which is advantageous to traders looking for a more balanced index.

Like all leveraged ETFs, Direxion's daily SPXL fund also provides multiple of its benchmarks in daily return. However, the S&P 500 is made to hold funds for a long period while SPXL is not, as cumulative returns over a long time can vary widely. Direxion Daily SPXL bull 3x shares are also a bit higher in price than its ProShares ultra counterparts, with an expense ratio of 1.01%. As an investor, if you are not a great fan of the Nasdaq-100 index, you can select SPXL to get exposure to the S&P 500.

Direxion Daily S&P 500 Bull 2x Shares (SPUU)

It is a down-toned version of Direxion daily S&P SPXL bull 3x shares. Like ProShares, Direxion daily has many versions with different exposure ratios. If you select SPUU, you will get twice the leveraged exposure to S&P 500.

The composition of Direxion daily SPXL and Direxion daily SPUU are similar; for instance, both ETFs have leveraged exposure to the S&P 5000 through swap derivatives. However, the only difference you can spot here is the amount of leverage offered by swaps. Direxion Daily SPUU is cheaper and more affordable than other leveraged ETFs, with an annual expense ratio of only 0.63%. For a portfolio of $10,000, the fee would be only $63.

Amplify BlackSwan Growth and Treasury Core leveraged ETF (SWAN)

In contrast to all leveraged ETFs we have discussed, SWAN ETF can be held for a longer period. As the name indicates, it is designed to protect against black swan events. Black swans are unforeseen risks that can significantly impact investment portfolios.

For better understanding, you can consider the COVID-19 crash and the subprime mortgage crisis of 2008. To cope with that risk, SWAN has allocated 90% of its shares towards the intermediate-term U.S. Treasury bills. It offers seven times leveraged equally to 0% holding in the S&P 500.

The SWAN ETF composition can be defined as 70%/90% amalgamate between the S&P 500 and Treasury for the equal of 1.6 times leverage. It is considerably cheaper than competitor finds within the expense ratio of 0.49%.

Wisdom Tree Core Funds (NTSX)

This leveraged ETF is also targeted to be held for a long time. Unlike SWAN, which obtains its leverage on the stock side utilizing options, NTSX chooses to leverage its Treasury through future derivatives. NTSX has allocated 90% of the holding to the S&P 500. However, the rest 10% is held in the form of cash as collateral for emergency Treasury futures, which is equal to holding 60% in bonds.

The final result is a 90%/60% split between the S&P 500 and immediate term treasury, or a typical stocks and bonds portfolio ratio of 60%/40% leverages 1.5 times. It provides NTSX with a significant risk-return profile and excellent efficiency due to futures. This leveraged ETF is cheaper than SWAN, changing the 0.20% expense ratio.

Direxion Daily Treasury Bull 3x Shares (TMF)

All leveraged ETFs are not similar. Some can retain fixed-income underlying assets such as Treasurys. A most common example to consider is TMF. Direxion daily treasury bull 3x shares take a portfolio of prolonged duration Treasury bonds and apply daily exposure three times or resetting leverage with the help of a swap. It generates a highly volatile leveraged ETF sensitive to interest rate changes of bull 3x shares.

The traders practising fixed-income can consider bull 3x shares TMF to speculate on interest rate yield curve changes without relying on margin or buying Treasury futures. However, currently, TMF is down due to rising interest rates and high inflation. Leveraged ETF TMF costs an expense ratio of 1%.  

ProShares UltraPro Short QQQ (SQQQ)

SQQQ is one of the most leveraged ETFs, which provide thrice-time exposure to the technology industry and large-caps focusing on the Nasdaq index. This beneficial ETF has a daily volume of around 71 million shares, making it a well-regarded leveraged fund with an expense ratio of only 0.95%.

Like most leveraged and inverse leveraged ETFs, SQQQ also tends to decline with time due to decay and the fact that stocks usually rise in the long run. Therefore, unlike inverse leveraged, SQQQ is considered the best for a holding period with a maximum of three months in the market.

Warnings with Leveraged ETFs

Leveraged ETF offers significant benefits to amplify daily returns. It holds many risks at the same time. Before investing and trading, you should keep some risks associated with leveraged ETF.

Significant Loss

A leveraged ETF magnifies daily return and can also result in steep losses in a short period, and a leveraged ETF can lose most of its value.

Restricted Leveraged ETFs

Many leveraged ETFs in the stock market are not traded. It implies that your ability to exercise them in a leveraged fund is restricted.

Use of Derivatives

Leveraged ETF utilizes different derivatives to boost the return. Hence, they are less likely to track the underlying asset closely.

No Long-term Investment

These finds are not ideal for long-term investment. Over the long-term holdings, ETF does not thoroughly monitor the daily return of the index they track.

Conclusion

Leveraged exchange-traded funds (ETF) is a useful tool that utilizes financial derivatives such as stocks, options or futures, and debt to boost the underlying index's return. Compared to traditional ETFs, these funds offer an average of 2:1 or 3:1 security in the underlying assets. However, with benefits, sometimes it also leads to a significant loss, so carefully handle leveraged ETFs.