A buffet of choices for an aggressive investor. The proliferation of exchange-traded products has allowed investors to deploy many strategies that used to require sophistication or expensive cost structures. There also are supercharged “leveraged” funds,…
A buffet of choices for an aggressive investor.
The proliferation of exchange-traded products has allowed investors to deploy many strategies that used to require sophistication or expensive cost structures. There also are supercharged “leveraged” funds, providing two times or three times the exposure. These funds contain other instruments such as futures or other derivatives to achieve that leverage and allow even smaller investors to make big-time bets on a specific theme. Remember, the leverage is calculated daily, so a 2x fund won’t deliver those returns long-term. Also, when the market falls, you’ll see twice the losses. Here are nine possibilities for investors interested in aggressive, leveraged funds.
The largest leveraged fund, TQQQ commands more than $4 billion in total assets. That isn’t surprising, since the fund is benchmarked to the Nasdaq 100 index that contains some of the most popular stocks, such as Apple (AAPL), Amazon.com (AMZN) and Facebook (FB). For investors who really love these names, this leveraged fund attempts 3x exposure to the tech-heavy Nasdaq 100 in a way to boost returns. The ups and downs have zeroed things out in 2018, but in an uptrend, this fund could really take off. Leverage: 3x Year-to-date performance: Flat
Of course, the Nasdaq 100 isn’t all tech stocks. American Airlines Group (AAL), retailer Costco Wholesale Corp. (COST) and consumer giant Kraft Heinz Co. (KHC) are also components of that key index. But if you want to focus on names like Apple and forget the rest, look to the TECL fund that aims to provide the same 3x leverage but to a sector-specific list of holdings. That subtle shift in the portfolio hasn’t resulted in blowout returns in this choppy market, but has allowed this fund to at least post positive returns since Jan. 1. Leverage: 3x Year-to-date performance: +2 percent
Investors who want a broader benchmark than the 100 stocks in the Nasdaq, which admittedly leans toward large technology companies, will find this fund is worth a look. The SSO looks to deliver two times the typical daily movement of the S&P 500. As the performance shows, however, leveraged funds can work against you. And it’s worth noting again that the fund is constructed to deliver 2x returns on a daily basis, and that the complex structure and comparatively high fees will not deliver 2x returns in the long term — so do not consider this a buy-and-hold instrument. Leverage: 2x Year-to-date performance: -6 percent
Credit Suisse FI Large Cap Growth Enhanced ETN (FLGE)
The FLGE is a balance between a plain S&P 500 and a technology focused fund that may see better growth from its components benchmarked to the Russell 1000 Growth index. That makes the universe double the size of the S&P 500, but with a bias toward stocks with growth characteristics like some of the more popular names in the tech sector. That formula has theoretically been paying off, with returns that are pretty nice in an otherwise choppy stock market that has left many investors flat to slightly negative. Just remember this fund is highly risky and doesn’t come with long-term peace of mind. Leverage: 2x Year-to-date performance: +6 percent
Once we acknowledge a twice-leveraged S&P 500 fund isn’t a long-term investment but rather for folks looking to make extra cash off an index, why settle for 2x when you can go to 3x exposure? That’s what this fund provides, with instruments that take leverage on the S&P to the next level. Of course, while that results in three times the profits when things are rosy, it results in three times the pain when you’re on the wrong side of the market — as has been the case, unfortunately, in 2018.Leverage: 3x Year-to-date performance: -11 percent
Speaking of the wrong side of the market, there are leveraged funds that aim for the opposite side of an index. That’s the case with this bear SPXS ETF that looks to deliver three times the opposite of the daily return in the S&P 500. If the S&P declines 1 percent, you will see this fund rise about 3 percent. This is on a daily, session-by-session basis so long-term correlation differs. And potential profits are eroded by above-average expenses that provide for this sophisticated strategy. Leverage: 3x Year-to-date performance: -5 percent
ETRACS Monthly Pay 2xLeveraged Dow Jones Select Dividend Index ETN (DVYL)
While some exchange-traded products seek capital appreciation, this fund is unique in that leverage is designed to boost dividends. Coupled with a promise of monthly distributions, this is an attractive option for investors looking for significant income. Tied to the Dow Jones Select Dividend index, which is comprised of stocks that include big names like telecom AT&T (T) and automaker Ford (F), the fund currently offers a 12-month yield of about 7.1 percent. Just be aware that the supercharged dividends may not offset the potential for supercharged losses in a volatile market, as we’ve seen in 2018. Leverage: 2x Year-to-date performance: -13 percent
Not everyone is looking to U.S. stocks. This Barclays fund is a leveraged offering benchmarked to the STOXX Europe 50 index. Similar to the Dow Jones Industrial Average, it provides a blue-chip representation with a list of 50 dominant stocks in Europe across 18 countries. While the U.S. stock market has been a bit volatile, the European market has been even worse thanks to comparatively lower growth rates and uncertainty caused by Brexit. Things may turn around, but the performance so far this year shows the perils of being in the wrong geography with your investments.Leverage: 2x Year-to-date performance: -17 percent
There are also options for investors looking at alternatives to equities. The UGLD provides that with 3x leveraged exposure to gold bullion. As an asset that is mostly uncorrelated to the stock market, some investors see gold simply as a hedge. But others see it as a potential profit center to drive outperformance when stocks aren’t consistently delivering. Just remember that “uncorrelated” in many ways means gold will do its own thing — and so far in 2018, that thing has been declining in value.Leverage: 3x Year-to-date performance: -23 percent