Navigating Leveraged ETFs: Strategies, Risks, and Opportunities November 22, 2024
Table of contents
- History of Leveraged ETFs
- Overview of MAS SIP Requirements
- How Do Leveraged ETFs Work?
- Trading Strategy using Leveraged ETFs
- Advantages and Disadvantages of Leveraged ETFs
- Top Assets & Average Daily Volume of Leveraged ETFs
- POEMS Guide
Inverse ETFs carry many risks and may not be suitable for risk-averse investors.
History of Leveraged ETFs
Leveraged Exchange-Traded Funds (ETFs) have gained significant popularity over the years, with trading volumes experiencing rapid growth. Introduced by ProShares in 2006, these ETFs allow traders and investors to capitalise on short-term market movements and implement inverse strategies1 to amplify potential returns.
Overview of MAS SIP Requirements
Since 2012, the Monetary Authority of Singapore (MAS) has mandated that brokers evaluate investors’ relevant knowledge and experience before allowing them to invest in Specified Investment Products (SIPs)2, to protect retail investors. As such, investors must complete the Customer Account Review (CAR) eligibility form before being allowed to invest in listed SIPs.
How Do Leveraged ETFs Work?
Leveraged ETFs are designed to amplify both returns and risks, typically by two to three times the performance of their underlying index. For example, TQQQ is a 3x leveraged ETF that moves approximately 3% for every 1% movement in the NASDAQ-100 index. Similarly, SQQQ is an inverse leveraged ETF that moves in the opposite direction of the NASDAQ-100 by three times, providing an opportunity to potentially profit from declines in the index.
Chart 1.1: TQQQ/SQQQ vs NASDAQ-100
Trading Strategy Using Leveraged ETFs
The table below outlines the key aspects of Leveraged ETFs, providing a concise overview of their main features and potential applications:
| Feature | Description |
| Short-Term Use | Ideal for day-to-day or short-term trading due to daily rebalancing, not suited for long-term holding. |
| Value Decay | Daily rebalancing can lead to ‘value decay’ over time, especially in volatile or sideways markets. |
| Potential to Amplify Returns | Allows investors to potentially magnify returns on a short-term outlook with less capital. |
| Hedging Tool | Can be used to protect portfolios against market downturns, with a temporary hedge. |
| Risk Management | Use for hedging specific positions or managing market risk in volatile conditions. |
Table 1.1: Leveraged ETFs Features
Advantages & Disadvantages of Leveraged ETFs
The following table summarises the advantages and disadvantages of leveraged shares:
| Aspect | Advantages | Disadvantages |
| Amplification | Potential for significant short-term gain with smaller capital outlay | Potential for significant losses as losses can accumulate quickly in volatile markets |
| Convenience & Accessibility | Traded like regular ETFs, making them more accessible than futures or options | – |
| Decay from Daily Rebalancing | – | Daily rebalancing can lead to “compounding risk”, eroding value over time |
| Market Cycles | Performs optimally in trending markets | Sideways markets can erode value due to the resetting mechanism, reducing returns |
Table 1.2: Leveraged ETFs Advantages & Disadvantages
Investors should be aware that leveraged and inverse ETFs are specifically designed to track daily market movements and are generally not intended for holding periods longer than a few days or weeks. Due to daily rebalancing, these ETFs can experience value decay over time, which can erode returns if held for extended periods.
Top Assets & Average Daily Volume of Leveraged ETFs
As of 9 November 2024, data from ETFdb.com highlights the ETFs with the largest assets and highest average trading volumes available for trading on POEMS3. Leading ETF issuers like ProShares, Direxion, and GraniteShares are among the top providers of leveraged ETFs.
| Symbol | ETF Name | Leverage | Total Assets (US$ Mil) | YTD Return | Avg Daily Volume |
| TQQQ | ProShares UltraPro QQQ | 3x | 25,139.5 | 64.95% | 49,997,796 |
| SOXL | Direxion Daily Semiconductor Bull 3x Shares | 3x | 11,299.9 | 13.37% | 89,975,304 |
| QLD | ProShares Ultra QQQ | 2x | 7,702.31 | 45.84% | 3,071,379 |
| SSO | ProShares Ultra S&P 500 | 3x | 5,554.67 | 50.19% | 2,234,171 |
| SPXL | Direxion Daily S&P 500 Bull 3X Shares | 3x | 5,512.15 | 76.40% | 3,505,306 |
| NVDL | GraniteShares 2x Long NVDA Daily ETF | 2x | 5,493.24 | 457.08% | 21,505,498 |
Table 1.3: Top AUC & Volume Leveraged ETFs
POEMS Guide
Leveraged and inverse ETFs can provide opportunities to amplify returns or hedge against market declines, but they require careful evaluation due to their inherent risks. Be sure to explore our previous ETF market journal, where we delve into strategies for leveraged ETFs. Like any investment, incorporating leveraged ETFs into your portfolio requires thorough research and a clear understanding of your financial goals and risk tolerance.
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Reference:
- [1] ProShares. (n.d.). Leveraged and inverse strategies, 9 November 2024
- [2] Singapore Exchange (SGX) Academy. (n.d.). Specified Investment Products (SIP), 15 November 2024
- [3] ETF Database. (n.d.). Leveraged equity ETFs, 9 November 2024
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About the author
Thng Xiao Xiong
Xiao Xiong is an assistant manager in the Global Markets Team specializing in UK markets. He is a graduate of the Singapore Institute of Technology with a bachelor's in Aircraft System Engineering. He has a strong interest in macroeconomics and options strategies.
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