Should You Use Leveraged ETFs?

The WSJ had an interesting article called “Bigger Bets and Risks with these ETFs.” It addresses the use of leveraged ETFs to enhance performance or to double your losses.

The story uses the Rydex Dynamic S&P; 500 fund as an example, which tries to duplicate double the daily performance of the S&P; 500 stock index. Interestingly, during the recent market pullback the Rydex S&P; 500 lost 6.3% while the traditional Vanguard 500 Index fund lost only 3.1%.

However, over a longer period of time, there seems to be quite some disconnect from the daily objective. The study says that the Rydex S&P; 500 fund gained an average of 11.2% a year over 5 years, while the Vanguard 500 Index fund gained 9.6% annualized.

Huh?

What that means to me is that you are getting in the neighborhood of twice (or more) the downside risk, but nowhere near twice the upside potential reward.

That’s not a good combination and, as I mentioned before, I personally don’t use leveraged instruments in my advisor practice. I suggest you research carefully what you are getting into, should you consider leveraging your portfolio.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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