RSP Leveraged ETFs Explained in Simple Terms

RSP Leveraged ETFs can be a powerful tool for investors, but they can also be intimidating if you're new to the world of ETFs.

RSP Leveraged ETFs are Exchange-Traded Funds that use leverage to amplify the returns of the underlying asset class, such as stocks or bonds.

In simpler terms, RSP Leveraged ETFs are like a supercharger for your investments, allowing you to potentially earn more in a shorter amount of time.

However, it's essential to understand that RSP Leveraged ETFs are not suitable for all investors, and they can be riskier than traditional investments.

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ProShares Ultra S&P 500 (SSO) is an example of a 2x leveraged ETF, seeking daily investment returns that are twice the daily performance of the S&P 500 Index. It has an expense ratio of 0.89% and an annual dividend yield of 0.17%.

Direxion Daily S&P 500 Bull 2× Shares (SPUU) is another 2x leveraged ETF, designed for investors who can tolerate risk and monitor their holdings daily. It has an expense ratio of 0.63% and an annual dividend yield of 5.30%.

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ProShares UltraPro S&P 500 (UPRO) is a 3x leveraged ETF, seeking daily investment returns that are triple the return of the S&P 500 Index. It has an expense ratio of 0.91% and an annual dividend yield of 0.04%.

Direxion Daily S&P 500 Bull 3x Shares (SPXL) is a 3x leveraged ETF, targeting daily investment returns of 300% of those of the S&P 500 Index. It has an expense ratio of 0.97% and an annual dividend yield of 0.12%.

Here are some key statistics for these popular leveraged ETFs:

Leveraged ETFs can be riskier investments than non-leveraged ETFs, given that they respond to daily movements in the underlying securities.

A 2x ETF may return 2% on a day when its benchmark rises 1%, but you shouldn’t expect it to return 20% in a year when its benchmark rises 10%.

The ProShares Ultra S&P 500 (SSO) is a 2x leveraged ETF that seeks daily investment returns that are twice the daily performance of the S&P 500 Index. It has an expense ratio of 0.89% and an annual dividend yield of 0.17%.

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The SSO ETF holds shares of the companies that comprise the S&P 500 and uses various swaps to provide leveraged exposure to the index, with a three-month average daily volume of 6,458,386 and assets under management of $3.0 billion.

Leveraged ETFs are designed to achieve their multiplier on one-day returns, but you shouldn't expect that they will do so on longer-term returns.

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Leveraged ETFs tend to have above-average expense ratios, but that's not the main reason investors should avoid them.

The key issue lies in the way these funds are structured, with a focus on daily returns rather than long-term performance.

A triple-leveraged ETF will give you triple the daily return of the underlying index, but this doesn't mean it will produce triple the return of the index over long periods of time.

Consider a simplified example where a stock index falls by 20% on the first day, rallies by 20% on the second day, and then falls by 25% on the third day. The net loss for the three-day period is 28%.

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A triple-leveraged ETF tracking the same index would fall by 60% on the first day, rise by 60% on the second day, and drop by 75% on the third day, resulting in a three-day loss of 84%.

In the first case, the non-leveraged ETF would have to rise by 39% to get back to even, but the leveraged ETF would need to rally by a staggering 525% just to break even.

Declines in the index have a more devastating effect on the long-term performance of leveraged ETFs, essentially creating a negative bias over time.

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Leveraged ETFs can be a bit tricky to understand, especially when compared to normal ETFs. They're designed to provide a multiple of the daily return of the underlying index, but this doesn't necessarily translate to long-term performance.

For example, the ProShares Ultra S&P 500 (SSO) ETF seeks daily investment returns that are twice the daily performance of the S&P 500 Index. This means it can be a good option for investors who can tolerate risk and are willing to monitor their holdings on a daily basis.

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However, as we'll see, leveraged ETFs can be riskier investments than non-leveraged ETFs. They respond to daily movements in the underlying securities, which can amplify losses during price declines.

One of the key differences between leveraged ETFs and normal ETFs is their expense ratios. The ProShares Ultra S&P 500 (SSO) ETF has an expense ratio of 0.89%, which is above average.

Here's a comparison of the ProShares Ultra S&P 500 (SSO) ETF with an unleveraged S&P 500 ETF:

As you can see, the unleveraged S&P 500 ETF has a significantly lower expense ratio and a higher annual dividend yield. This can make it a more attractive option for long-term investors.

However, it's worth noting that leveraged ETFs can be designed to reset their leverage daily, which can result in compounding of returns when held for multiple periods. This can be a benefit for investors who are looking to take advantage of short-term market movements.

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The S&P 500 Index has declined by nearly a fifth over the last year, but it has climbed in recent weeks.

Leveraged ETFs work by using derivatives to produce a multiple of the daily returns of an index, which can be a powerful tool for investors looking to amplify their returns.

The 2× leveraged S&P 500 ETF with the lowest fees is SPUU, while SSO has the highest liquidity.

The 3× leveraged S&P 500 ETF with the lowest fees is UPRO, and SPXL had the highest liquidity.

The one-year total return of the S&P 500 Index is -14.4%, as of Nov. 18, 2022.

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