Your Guide to 3x Leveraged ETFs

Your Guide to 3x Leveraged ETFs

While leveraged exchange-traded funds (ETFs) can be risky investments, they can also provide substantial profits. These 3x leveraged ETFs allow you to make up to three times the normal return while also allowing you to lose up to three times the normal loss. Take the time to learn about leveraged ETFs, especially if you're new to trading, since they might not be a suitable fit for your trading approach. 

  • 3x leveraged ETFs seek to deliver three times the returns of the underlying index.
  • This also means that 3x leveraged ETFs will create three times the index's losses.
  • It's also important to understand that the return is based on the daily return, not the annual return.
  • 3x leveraged ETFs are frequently seen as poor long-term investments.

What to Know About 3x Leveraged ETFs

Even if this is the intention, leveraged ETFs do not guarantee a greater return on their underlying index or asset. If the underlying index returns 15% in a month, the 3x leveraged ETF seeks to return 45 percent, and vice versa—a 15% loss in a month for the index should result in a 45 percent loss for the ETF. It's also important to understand that the return is based on the daily return, not the annual return. As a result, it may be unwise to consider 3x leveraged ETFs as long-term investments. 

Other Leveraged ETFs

While we'll focus on 3x leveraged ETFs in this article, there are other forms of leveraged ETFs, such as 2x leveraged ETFs. These serve the same goal as investing but can provide up to two times the return (or two times the losses). In the long run, leveraged ETFs are not appropriate for every investor's portfolio, so consider your choices before investing.

List of 3x Leveraged ETFs

There are various 3x leveraged ETFs to consider for their portfolios. Keep in mind that 3x leveraged ETFs might modify their investing goal, such as going from 3x to 2x leveraged. They may also shut and liquidate if they are unable to attract sufficient investment assets. It is also critical to understand when an ETF is leveraged and when it is inversely leveraged. This implies that the ETF will earn profits even if the underlying index it monitors falls. 

Frequently Asked Questions (FAQs)

How does a 3x leveraged ETF work?

A normal ETF typically owns a basket of equities, but a leveraged ETF typically holds derivatives such as swaps and futures. 4 When compared to holding common stock, these financial instruments increase risk and leverage. They are riskier bets than merely owning the equities, but this is what allows a leveraged ETF to magnify volatility. 

How do you trade 3x leveraged ETFs?

It is the same as accessing any other ETF to leveraged ETFs. Simply search your brokerage for the ETF you choose, and if it is available, submit a trade order for that ticker symbol. In terms of leveraged ETF trading technique, keep in mind that they often lack the volume and liquidity of the index they monitor, and they aren't intended for long-term holding. 

What is decay with 3x leveraged ETFs?

One typical criticism leveled with leveraged ETFs is that they "decay." This phrase refers to how leveraged ETF performance differs from that of ordinary ETFs tracking the same index. To maintain the right levels of leverage, leveraged ETFs must rebalance their holdings on a regular basis. This approach increases trading and administration expenses and has the potential to drastically alter price action.   

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