What does 3x mean in ETF?
An ETF that is leveraged 3x seeks to return three times the return of the index or other benchmark that it tracks. A 3x S&P 500 index ETF, for instance, would return +3% if the S&P rose by 1%.
Further, we see that the sweet spot for leverage is around 2x. At 3x leverage, the returns don't improve enough to compensate for the additional risk.
So, if you invest in a 3x leveraged ETF, its return ratio would be 3:1. In turn, should the value of the underlying index increase by 1% on a given day, your returns would actually be 3%. The daily nature of these funds ultimately makes them best suited to be short-term securities.
The largest Leveraged ETF is the Direxion Daily Semiconductor Bull 3X Shares SOXL with $8.24B in assets. In the last trailing year, the best-performing Leveraged ETF was NVDL at 430.89%.
If you own a leveraged ETF you can't lose more than your initial investment amount. You would never be liable for more than you invested; in a sense, the amount you could lose is capped.
Triple-leveraged ETFs also have very high expense ratios, which make them unattractive for long-term investors. All mutual funds and exchange-traded funds charge their shareholders an expense ratio to cover the fund's total annual operating expenses.
Because they rebalance daily, leveraged ETFs usually never lose all of their value. They can, however, fall toward zero over time. If a leveraged ETF approaches zero, its manager typically liquidates its assets and pays out all remaining holders in cash.
| Highest Volume (unleveraged) | SPY | FXI |
|---|---|---|
| Most Volatile (leveraged) | LABD | BOIL |
| Most Volatile (unleveraged) | UNG | VXX |
| Best ETFs for cash accounts | SPY/SH | QQQ/PSQ |
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.
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.
Are 3x ETFs safe?
The Bottom Line. Given the volatility that is inherent in financial markets, only investors who have the time to pay attention to these investment vehicles should consider allocating a small portion of their investments into 3x leveraged ETFs.
Under the Investment Company Act, private investment funds (e.g. hedge funds) are generally prohibited from acquiring more than 3% of an ETF's shares (the 3% Limit).
A leveraged exchange-traded fund (LETF) uses financial derivatives and debt to amplify the returns of an underlying index, stock, specific bonds, or currencies. While a traditional ETF typically tracks the securities in its underlying index on a one-to-one basis, a LETF may aim for a 2:1 or 3:1 ratio.
This longer-term underperformance results from ill-timed rebalancing and the geometric nature of returns compounding. The author uses the concept of a growth-optimized portfolio to show that highly levered ETFs (3x and inverse ETFs) are likely to converge to zero over longer time horizons.
Because leveraged single-stock ETFs in particular amplify the effect of price movements of the underlying individual stocks, investors holding these funds will experience even greater volatility and risk than investors who hold the underlying stock itself.
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.
Hold ETFs throughout your working life. Hold ETFs as long as you can, give compound interest time to work for you. Sell ETFs to fund your retirement. Don't sell ETFs during a market crash.
For ETFs held more than a year, you'll owe long-term capital gains taxes at a rate up to 23.8%, once you include the 3.8% Net Investment Income Tax (NIIT) on high earners. If you hold the ETF for less than a year, you'll be taxed at the ordinary income rate.
However, it's rare for broad-market ETFs to go to zero unless the entire market or sector it tracks collapses entirely. The sharpest decline the last few decades has been in 2007, when some total stock market ETFs like IWDA lost 37% in one year.
Buying long positions on TLT is essentially a bet that inflation may be nearing a cyclical peak and that yields will come back down as the economy begins to cool.
Are there 4x leveraged ETF?
Importantly, the 4x leveraged S&P 500 fund is not an ETF, but is an ETN, or exchange traded note. The major difference is that ETNs carry credit risk and can shut down if the counterparty to the fund decides that they no longer want exposure to the fund.
If the leveraged ETF you're investing in is using a high-risk strategy, it's possible that your losses could exceed the amount you invested. By contrast, if you invest in a traditional ETF, you won't lose more than the amount you invested — and losing that entire investment is relatively rare with traditional ETFs.
Generally speaking, the best time to trade ETFs is closer to the middle of the trading day rather than the beginning or end.
| Symbol | Name | Dividend Yield |
|---|---|---|
| NGE | Global X MSCI Nigeria ETF | 85.61% |
| TSL | GraniteShares 1.25x Long Tesla Daily ETF | 81.98% |
| CYA | Simplify Tail Risk Strategy ETF | 80.58% |
| KLIP | KraneShares China Internet and Covered Call Strategy ETF | 66.09% |
One of the most popular and long-believed theories is that the best time of the week to buy shares is on a Monday. The wisdom behind this is that the general momentum of the stock market will, come Monday morning, follow the trajectory it was on when the markets closed.
