Triple Leveraged ETF

For investors with a high tolerance for risk, triple leveraged ETFs offer the potential for exceptional returns on investment with an equal potential for risk and financial loss. Also known as bull and bear ETFs, triple leveraged ETFs are extremely volatile and typically are based on futures contracts, thus accounting for their high risk and high potential for reward. Triple leveraged ETFs can allow investors to control a large quantity of stocks, securities, or funds with a relatively small upfront investment; this makes them an attractive choice for risk tolerant investors with an aggressive market strategy.

Triple leveraged ETF definition

Also known as a 3X ETF or a triple ETF, triple leveraged ETF investments allow investors to achieve exposure to the market at a much higher rate than straightforward stock or security purchases. Triple leveraged ETFs aim to create 300% profit margins on initial investments. When the underlying securities move in the direction the investor anticipates, the rewards can be astronomical compared to the initial outlay of cash; however, the investor can lose far more than they originally invested if the market moves in a direction unfavorable to the particular investment strategy.

Triple ETFs track the market

Triple leveraged ETFs are available in small cap, mid cap and large cap varieties. Additionally, investors can choose from short term, medium term, and long term triple ETF investments; short term ETFs usually have contracts of six months or less, with some terms as short as one month. Medium and long term triple ETFs are typically two years or five years respectively. While all types of 3X ETFs carry significant risks, short term triple ETFs are marginally less risky due to the shorter time period in which they are carried out. These ETFs are usually sector-specific due to their high level of risk; this allows investors to pinpoint the exact market in which they wish to invest. Not all triple leveraged ETFs are based on futures contracts, though many are; some incorporate equity swaps or index options rather than or in addition to futures contracts. Popular triple leveraged ETF choices include:
  • Direxion Energy Bear 3X (ERY)
  • Direxion Energy Bull 3X (ERX)
  • Direxion Financial Bear 3X (FAZ)
  • Direxion Financial Bull 3X (FAS)
  • Direxion Small Cap Bear 3X (TZA)
  • Direxion Small Cap Bull 3X (TNA)
  • Direxion Large Cap Bear 3X (BGZ)
  • Direxion Large Cap Bull 3X (BGU)

Case study

The triple leveraged ETF was first introduced to the market by Direxion in 2006; this investment option soon gained popularity and in 2008, Direxion established eight 3X ETFs for public investment. These Direxion triple leveraged ETFs included large and small cap bull and bear funds as well as bull and bear funds for financial and energy sector investments. Because Direxion triple leveraged ETFs are available in both bull and bear varieties, they allow investors to speculate on the probable movement of the market. In 2010, for example, the domestic bullish triple ETFs offered by Direxion are estimated to have lost 80% of their value, while the value of Direxion’s bearish triple ETF domestic investments have increased by approximately 100%.

Triple leveraged ETFs are designed to meet the needs of high-stakes investors with an outstanding tolerance for risk. Because investors can lose far more than their initial investment, they should be cautious in their first 3X ETF investments; novice investors are advised to avoid these high-risk securities until they have a solid understanding of market strategy and probable economic trends.
Tim Ord
Ord Oracle

Tim Ord is a technical analyst and expert in the theories of chart analysis using price, volume, and a host of proprietary indicators as a guide...
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