Leveraged long ETFs are leveraged by their structure of holdings (rather than by financial borrowing) to compound the effect of the ETF's price in relation to changes in the prices of the underlying holdings.
As such, they tend to be volatile in nature, so are attractive vehicles for swing trading and for careful active shorter-term investing over periods of a few months. They have the advantage of ease of position entry and exit, and never require margin coverage beyond the initial cost commitment.
In over four years, Direxion Daily Energy Bull 3X Shares
(NYSEARCA:ERX), the (3x) leveraged ETF holding energy stocks, has had 75 days with forecasts as attractive as the current one, and all but three of them have produced gains in our time-efficient disciplined test.
Including all 75, the average gain of 17.5% achieved in average holding periods of about three months, earned at an annual rate of 80%. The typical worst-case drawdown from cost was -18%, about equal to the average gain, but was recouped in nearly every holding to a substantial profit.
Direxion Daily Small Cap Bull 3X Shares
(NYSEARCA:TNA), a (3x) leveraged small-cap index-tracking ETF, is another high-return performer after seeing forecasts as appealing as the present. In over 200 prior cases, 94% of them were profitable, with average gains, including the 13 losers, of 16%.
Holding periods of only ten weeks put the annual rate up to over 100%. Average maximum drawdowns of -14% were well under the typical profit, and nearly all were recouped and turned into nice profits.
ProShares Ultra Basic Materials
(NYSEARCA:UYM), a (2x) leveraged ETF holding basic materials stocks, has had nearly two years of days (out of five years) with forecasts at least as attractive as today's, and has been able to reward investors with profits in seven of every eight cases.
Including the losses, gains averaged 15.5% in typical holding periods of 11 weeks, to score at an annual rate of 93%. Maximum drawdowns averaged -11%.
Other leveraged long ETFs achieved attractive gains, but these three were the largest and most consistent.
Since the VIX Index
(INDEXCBOE:VIX) usually goes down -- reflecting compressing uncertainty conditions -- as the stock market rises, volatility-focused ETFs all suggest a rising market, in contrast to what the pros' forecasts of our monitored population indicate. The apparent contrary posture of SVXY is due to its structure as an inverse-acting instrument.
If markets continue to rise, the ProShares Short VIX Short-Term Fut ETF
(NYSEARCA:SVXY) will likely have a strongly leveraged price gain. So here is an alternative: Buy SVXY if you think we are likely to see momentum, Boston Strong optimism, and US consumer spending (regardless of a dismal jobs picture) continuing, at least among the 85% to 90% of the work-desiring and employed population.
Or, if the chaos in Syria, Iraq's return to religious conflict, the North-African Arab Spring losing its democracy, Iran continuing to spoof the rest of the world in an effort to catch up to North Korea, and Cyprus' contribution to the dissolution of Germany's effort to finally control the rest of Europe via a common euro currency bothers you, then maybe the now-weakened gold market is a place to hide.
We prefer to focus on choices of specific investment opportunities as appraised by well-informed, at-risk, and experienced players, and leave the general background noise for talking heads to babble about from their TV-prompter scripts.
Avoiding a "long-term-investment" mentality for active, shorter-term focus on timely opportunities keeps investment portfolios flexible to adjust with changing circumstances.
Editor's Note: This article was written by Peter F. Way of Block Traders' ETF Monitor
Below, find some more great investing and trading content from MoneyShow:
Buy, Sell, or Cash: How to Decide
Why Volatility ETFs Are Bad Mirrors
Trading Volatility ETFs and ETNs
No positions in stocks mentioned.
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