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2 Leveraged Equity ETFs For Higher Returns (But Also Added Risk)

Published 12/13/2021, 04:33 AM
Updated 09/02/2020, 02:05 AM

Investors’ appetite for leveraged ETFs has been on the rise. By using leverage, such products provide the possibility of doubling or tripling daily returns that would typically be offered by an index.

In 2006, ProShares became the first fund manager to offer leveraged ETFs. Now, leveraged derivatives offered by both ProShares and Direxion dominate this asset class.

Despite the lure of higher returns, readers should note that the use of leveraged funds could also lead to sizeable risk. Recent research highlights:

“Leverage (borrowing to invest) is a way to increase potential returns for an investment, at the expense of increased risk. For a passive investor in the stock market, this can be achieved by taking margin loan from the brokerage, or buying leveraged exchange traded funds (LETFs). LETFs… are usually not recommended as long term investments due their decay during fluctuations (even when the index “fluctuates” around a constant value the LETF loses).”

Similarly, the US Securities and Exchange Commission has also warned retail investors on the potential risks of such complex instruments. Put another way, in the long-run, these pre-packaged margin products, typically “do not equal the target leverage times the index returns.”

With that information, we introduce two leveraged ETFs. For experienced readers who appreciate the potential risks they carry, such funds could be appropriate vehicles for executing daily trades. On a final note, most leveraged ETFs have high expense ratios, typically close to 1% a year.

1. ProShares Ultra MidCap400

  • Current Price: $67.66
  • 52-week Range: $44.26 - $75.18
  • Expense ratio: 0.95% per year

Our first leveraged ETF focuses on US mid-capitalization (cap) stocks. The objective of the ProShares Ultra MidCap400 (NYSE:MVV) is to achieve a daily return that is 2x the return of the S&P Midcap 400 index, the underlying benchmark. The fund was listed in June 2006, and has about $187.5 million under management.

MVV Weekly

Among the top stocks in MVV are Signature Bank (NASDAQ:SBNY), which accepts Bitcoin; managed healthcare provider Molina Healthcare (NYSE:MOH), FactSet Research Systems (NYSE:FDS), which provides financial information and analytics; real estate investment trust (REIT) Camden Property Trust (NYSE:CPT), Builders FirstSource (NYSE:BLDR), which supplies building materials; and Trex Company (NYSE:TREX), which manufactures composite decking.

Over the past year, MVV is up 49.9%. Meanwhile, in the past month, this leveraged ETF is down almost 8%.

But by comparison the SPDR S&P Midcap 400 ETF (NYSE:MDY), a non leveraged ETF that tracks the same index, is down almost 3.8% in the past month. Short-term traders who are bullish on US mid-caps could research MVV further.

2. Direxion Daily Healthcare Bull 3X Shares ETF

  • Current Price: $125.27
  • 52-week Range: $69.14 - $133.29
  • Expense ratio: 0.95%

Our next fund, the Direxion Daily Healthcare Bull 3X Shares ETF (NYSE:CURE) focuses on the US healthcare sector. Such firms include biopharma names, suppliers of healthcare services as well as equipment and manufacturers of life sciences tools. The fund started trading in June 2011 and net assets stand around $$227.7 million.

CURE Weekly

CURE aims to provide a daily return that is 3X the return of Health Care Select Sector Index, its benchmark. The fund currently has 63 stocks.

Leading holdings include healthcare giant Johnson & Johnson (NYSE:JNJ); managed healthcare and insurance heavyweight UnitedHealth Group (NYSE:UNH); Pfizer (NYSE:PFE), which has been in the news during the pandemic because of its widely used COVID vaccination; Thermo Fisher Scientific (NYSE:TMO), which manufactures analytical instruments and laboratory products; and medical technology group Medtronic (NYSE:MDT).

CURE returned 67.4% in the past year. By comparison, the iShares US Healthcare ETF (NYSE:IYH), a non leveraged ETF in the sector, is up 17.9%.

The healthcare sector is likely to stay in the limelight in the new year as well. Therefore, CURE could appeal to a number of traders.

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