Let's take a look at one of the oldest leveraged funds, Rydex's Nova Fund (RYNVX). The fund's first full year of operation was in 1994. For the 18-year period 1994-2011, the S&P 500 Index provided an annualized return of 7.7 percent.
The first leveraged ETF was issued by ProShares in 2006. In 2008, the SEC authorized the creation of ETFs that use active management strategies. Bear Stearns launched the first actively managed ETF, the Current Yield ETF (NYSE Arca: YYY), which began trading on the American Stock Exchange on March 25, 2008.
Direxion launched its first leveraged ETFs in 2008. In November 2008 the company was the first to offer ETFs with 3X leverage, a move that was copied some months later by its competitors ProShares and Rydex Investments.
SPDR is an acronym for the Standard & Poor's Depositary Receipts, the former name of the ETF. It is designed to track the S&P 500 stock market index. This fund is the largest and oldest ETF in the world.
ProShares UltraPro QQQ TQQQ
ProShares UltraPro QQQ is the most popular and liquid ETF in the leveraged space, with AUM of $11.4 billion and an average daily volume of 172.7 million shares a day.
The SP5Y Exchange Traded Fund (ETF) is provided by Leverage Shares PLC. This ETF provides leveraged exposure (5x) to Large Cap US Equities.
Leveraged ETF prices tend to decay over time, and triple leverage will tend to decay at a faster rate than 2x leverage. As a result, they can tend toward zero.
Triple-leveraged ETFs also have very high expense ratios, which make them unattractive for long-term investors.
Leveraged 3X Gold ETFs seek to provide investors with a magnified daily or monthly return on physical gold prices. The funds use futures contracts to accomplish their goals and can be either long or inversed. As the name suggests, the level of magnitude is three times the daily or monthly gain/loss.
Because leveraged single-stock ETFs in particular amplify the effect of price movements of the underlying individual stocks, investors holding these funds will experience even greater volatility and risk than investors who hold the underlying stock itself.
Leveraged ETFs decay due to the compounding effect of daily returns, also known as "volatility drag." This means that the returns of the ETFs may not match the returns of the underlying asset over longer periods.
There are currently 211 leveraged ETFs that trade on U.S. stock exchanges, including inverse leveraged ETFs.
Investors can choose from a variety of ETFs that trade globally. BlackRock's iShares is the largest provider of ETFs as calculated by assets under management. Other major ETF providers include Vanguard, State Street, Invesco, and Charles Schwab.
A turnover ratio of 100% means the ETF or mutual fund has bought and sold all its positions within the last year. A relatively low turnover ratio—20% or 30%—indicates a buy & hold strategy. A high turnover ratio—100%+ -would indicate an investment strategy involving more trading than holding.
ARK Autonomous Technology & Robotics ETF (ARKQ)
ARKQ stock has benefited from its large Tesla position with a gain of 17.5% year-to-date, and the average ARKQ price target of $58.56 implies even more upside of 22.8% ahead. As you can see, Tesla is ARKQ's largest position, with a weighting of 13.7%.
A trader can hold the majority of these ETFs including TQQQ, FAS, TNA, SPXL, ERX, SOXL, TECL, USLV, EDC, and YINN for 150-250 days before suffering a 5% underperformance although a few, like NUGT, JNUG, UGAZ, UWT, and LABU are more volatile and suffer a 5% underperformance in less than 130 days and, in the case of JNUG ...
Investors can hold the ETF for longer than a day, but returns can vary significantly from 2x exposure over longer periods. That's because the ETF resets its leverage daily. In oscillating markets, the leverage reset can significantly erode returns.
5-Year Holding Period: Worse Performance Than 1-Year
However, due to the asymmetric effect of magnifying losses more than gains, holding TQQQ for too long can actually have disastrous effects, especially since the longer you hold, the more likely you are to encounter a major protracted bear market.