Leveraged ETFs - ProShares Ultra Funds

What are Leveraged ETFs?

Leveraged ETFs offer investors a simple way buy a broad index or sector, but at the same time, they allow traders to double the returns of a traditional unleveraged equivalent. Not only can you double the returns when the index moves higher; you can also go long or buy double leveraged short ETFs which will return double the returns when the market moves lower.

Who Trades Leveraged ETFs?

You will see many day traders using double leveraged ETFs to play the short term swings of a market. This way, small moves in the index can be glorified into larger moves and the trader does not need to employ the use of margin. This is particularly useful for trading in rollover IRA's or regular IRA's where margin is restricted.

Disadvantages/Drawbacks of Leveraged ETFs

There are a few negatives of leveraged ETFs that we should cover here. First, they tend to have a lack of liquidity compared to their single leveraged ETF counterparts. There just isn't a large market for these instruments and it will become risky for those of you who trade larger sizes and need to either get out with the least amount of slippage or hedge the position using options contracts. The spreads on some of the less liquid double leveraged ETFs can be a couple dollars at times and this makes it nearly impossible to trade these with any consistency.

Secondly, expense ratios for leveraged ETFs is higher and makes it very difficult for longer term investors to profit the way they should when the underlying index moves.

Thirdly, you need to be careful to check into the underlying positions that are held by the leveraged ETF. This is the case especially for leveraged sector funds which may or may not have all the stocks that you expected them to have. Some of the ETFs may have excluded key components of a sector.

List of Leveraged ETFs - Long and Short