“Just last week, ProShares launched the first triple-leveraged ETFs tied to the S&P 500 index. ProShares UltraPro S&P 500 (UPRO) is a 3x ETF for bulls, while ProShares UltraPro Bear S&P 500 (SPXU) is a 3x leveraged inverse ETF,” Money and Markets from Istockanalyst.com reports.
“What a deal! Wouldn’t it be great to double or triple your gains? Far be it from me to throw water on the party, but I have to tell you it’s not quite so simple. Yes, leveraged ETFs can be very useful in some circumstances. But before you put a penny into any leveraged ETF, you need to know exactly what you’re getting into,” Istockanalyst.com reports.
“The good news is that leveraged ETFs almost always do what they’re designed to do. The bad news is that way too many investors don’t understand what these ETFs are designed to do — and expect more than the fund sponsors ever promised to deliver. Think about it this way: If you want to crash your way through the forest, you buy a Hummer. If your goal is to win a drag race, you get a souped-up Chevy. But if you try to drive the Chevy across a river, you probably won’t make it, any more than you can hit 150 mph in the Hummer. In either case, you’ve chosen a vehicle that is unsuitable for your purpose. Blaming the manufacturer is pointless; they never told you to use their products as you did,” Istockanalyst.com reports.
“What people don’t understand about leveraged ETFs: The 2x or 3x leverage factor can change dramatically, depending how long you own the fund. That’s because the leverage is reset every day. This means that even if a leveraged ETF’s benchmark moves sideways, its value could still melt away like butter in a microwave oven. Over time, the result can be a huge mismatch between what you think you should get and what you actually do get. In nearly every case, the long-term performance of both the long and inverse versions of leveraged ETFs will underperform their benchmark indexes,” Istockanalyst.com reports.
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