Why triple leveraged ETFs are bad?
A leveraged ETF uses derivative contracts to magnify the daily gains of an index or benchmark. These funds can offer high returns, but they also come with high risk and expenses. Funds that offer 3x leverage are particularly risky because they require higher leverage to achieve their returns.
Nearly all leveraged ETFs come with a prominent warning in their prospectus: they are not designed for long-term holding. The combination of leverage, market volatility, and an unfavorable sequence of returns can lead to disastrous outcomes.
Leveraged ETFs amplify daily returns and can help traders generate outsized returns and hedge against potential losses. A leveraged ETF's amplified daily returns can trigger steep losses in short periods of time, and a leveraged ETF can lose most or all of its value.
Leveraged ETFs use various financial instruments such as futures, options and swaps to achieve their leverage. These instruments have associated costs, including transaction costs, bid/ask spreads and management fees. These costs can eat into the returns of the ETF and contribute to its decay.
Downside risk has been above average.
TQQQ has a draw down risk of -89.60%, which is the largest price decline experienced over the last three years. This fund has a three year standard deviation of 75.4%. This fund has experienced excessive volatility in its monthly performance over the last 36 months.
Leveraged ETF prices tend to decay over time, and triple leverage will tend to decay at a faster rate than 2x leverage. As a result, they can tend toward zero.
The daily rebalancing of leveraged and inverse ETFs creates a situation that for periods longer than a day or two the return of a leveraged or inverse ETF will deviate from the margin account benchmark.
For most standard, unleveraged ETFs that track an index, the maximum you can theoretically lose is the amount you invested, driving your investment value to zero. However, it's rare for broad-market ETFs to go to zero unless the entire market or sector it tracks collapses entirely.
The Direxion Daily Junior Gold Miners Index Bull 3x Shares (JNUG) and the Direxion Daily Junior Gold Miners Index Bear 3x Shares (JDST) are the two most volatile exchange-traded funds of all. Each has a one-year volatility reading of about 170.
BMO has launched the first quadruple leveraged ETN fund that tracks the S&P 500. The fund will trade under the ticker symbol "XXXX" and seeks to generate four time the S&P 500's return on a daily basis. The launch come as bullishness rise among investors and Wall Street predicts more gains to come in 2024.
What is the biggest risk of leveraged ETF?
The two major risks associated with leveraged ETFs are decay and high volatility. High volatility translates to high risk.
By some estimates, returns generate up to 74% less rebalancing by leveraged and inverse ETFs once capital flows are taken into account. As a consequence, the potential for these types of products to exacerbate volatility should be much lower than many claim.
1. Market risk. The single biggest risk in ETFs is market risk.
TQQQ seeks daily returns that are three times those of the QQQ (before fees and expenses.) QQQ experiences smaller price fluctuations and is considered to be less risky than TQQQ. Therefore, QQQ is best suited for long-term buy-and-hold investors, while TQQQ is better for active taders.
Re: Investing 100% into TQQQ
I've held this long term and short term. Don't hold it long term for anything more than your “play money”, which for those that even allow for “play money” in their IPS is no more than 5%. The biggest risk is a sideways choppy market.
The daily resetting of leveraged ETFs means the fund only provides the return multiple relative to the underlying index on a daily basis, not necessarily over the long term. Because of this, volatility of the index can eat away at gains; this is known as volatility decay or beta slippage.
Because of the volatility associated with leveraged ETFs, it is inadvisable to hold them after market close. Otherwise, you may see the value of your investment gap down 5% to 10% when the market reopens.
Direxion launched its first leveraged ETFs in 2008. In November 2008 the company was the first to offer ETFs with 3X leverage, a move that was copied some months later by its competitors ProShares and Rydex Investments.
Using leverage can result in much higher downside risk, sometimes resulting in losses greater than your initial capital investment. On top of that, brokers and contract traders often charge fees, premiums, and margin rates and require you to maintain a margin account with a specific balance.
While the Fund has a daily investment objective, you may hold Fund shares for longer than one day if you believe it is consistent with your goals and risk tolerance. For any holding period other than a day, your return may be higher or lower than the Daily Target.
Do leveraged ETFs reset daily?
Most leveraged and inverse ETFs reset each day, which means they are designed to achieve their stated objective on a daily basis. With the effects of compounding, over longer timeframes the results can differ significantly from their objective.
Most leveraged ETFs “reset” daily, meaning that they are designed to achieve their investment objective on a daily basis. Their performance over longer periods of time may differ significantly from the performance of the underlying index or benchmark during the same period of time.
Buying high and selling low
At any given time, the spread on an ETF may be high, and the market price of shares may not correspond to the intraday value of the underlying securities. Those are not good times to transact business.
ETFs may close due to lack of investor interest or poor returns. For investors, the easiest way to exit an ETF investment is to sell it on the open market. Liquidation of ETFs is strictly regulated; when an ETF closes, any remaining shareholders will receive a payout based on what they had invested in the ETF.
If Vanguard ever did go bankrupt, the funds would not be affected and would simply hire another firm to provide these services.
