How leveraged ETFs give three times performance without having to rely on margin.
Leveraged ETFs offer the performance of margin while eliminating the cost of the interest brokers typically charge for using margin. This is beneficial to the investor because they can achieve the performance of margin without fear of interest costs or margin calls.
Leveraged ETFs are designed to amplify the returns of an underlying index and are available for most indexes including the Nasdaq-100, the Dow Jones Industrial Average, and the S&P 500.
Leveraged ETFs mirror the daily changes in the underlying index. In a 2x leveraged ETF, if the index value goes up 1% that day, the leveraged ETF will increase by 2%. If the index loses 1% in value, the leveraged ETF will lose 2%.
The thing to know is that the longer leveraged ETFs are held, the less the leverage works. They are not really intended for a buy & hold strategy.
Roughly 4 years ago a new kind of leveraged ETF appeared offering three times leverage. This is incredibly potent, offering the investor an opportunity to increase performance at a rate beyond what is legally allowed in a normal margin account.
With a 3x leveraged ETF a 1% gain is magnified to a 3% gain. Losses are also magnified, so the real challenge in using a 3x leveraged ETF is knowing the best time to invest to achieve the greatest chance of success.
3x leveraged ETFs are able to achieve their results through advanced investment methodologies including derivatives.
The great news for an investor using a 3x leveraged ETF is they get the benefit of advanced money management without having to worry about the nitty-gritty details.
Thus one can buy & sell 3x leveraged ETFs like any other stock.
Special margin rules apply to leveraged ETFs.
One can’t margin a 3 times ETF to achieve 6 times performance.
But there’s some margin allowed. If you have $10,000 in cash and are buying a 3x leveraged ETF, you can invest up to $10,000 divided by .90 or about $11,100.
If you are investing that same dollar amount in a 2x leveraged ETF, you can invest up to $10,000 divided by .66 or about $15,000. The “extra” availability of margin with a 3x leveraged ETF provides a bit of a safety zone if one needs to invest a little more, while the added investing capacity with a 2x leveraged ETF allows one to effectively turn a 2x ETF into a 3x ETF. (We’ll cover when an investor might need this capability later.)
The Summerland Associates Alerts model tracks 3x leveraged ETFs because they offer the investor exposure to the greatest possible gains without needing to worry about margin interest or complex money management methods. Since Summerland Alerts work in high-probability scenarios, the 3x leveraged gains occur at a greater frequency than the 3x leveraged losses.
As an individual investor, you can select what risk-level you feel most comfortable with. You can use the alerts to easily trade the underlying index or you can use 2x or 3x ETFs to magnify your portfolio performance. Simply selecting an appropriate ETF that matches your risk appetite is the only adjustment you need to make. Just understand that our performance numbers are based on using the 3x ETF.
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