Best Long-Term Performance Trading – Leveraged Equity ETFs 1.1

Before I introduce the data on this group of ETFs, I need to point out the fact that leveraged ETFs are designed as trading vehicles and not long-term investments. If you want to know the dangers of these products you need to ‘Google’ this phrase: “leveraged ETF risk”. You will be inundated with article after article with headlines such as:

“Why Leveraged ETFs Are Not a Long-Term Bet”
“Why That Leveraged ETF Is A Bad Idea”
“Why Leveraged ETFs Are Horrible Investments”
“Leveraged ETFs: Why Investors Should Beware”
“Run, Don’t Walk, From Leveraged ETFs”

This sounds scary, right? Well, if you don’t know what you are doing, or you don’t have a strong stomach for volatility, then yes, you should stay away from leveraged ETFs altogether. But, if after reading all the horror stories about leveraged Exchange Traded Products, including my own horror story, you still feel compelled to purchase these investment vehicles, then this article is for you.

As I stated above, you can find many articles that condemn and warn people about using leveraged ETFs. But, if you search long enough and hard enough, you can find articles written by academics that support the use of leverage with mathematics instead of emotion.

My favorite article to refer to on the mathematics behind using leverage with investments is from Advisors Perspective: Should Leveraged ETFs Be Held for Long Horizons? That article does an excellent job of introducing the mathematics of risk vs return involved with leverage. Also, the chart above can be found in the referenced article. The intent of my article is to show the long-term performance of the 18 oldest leveraged equity ETFs. It is NOT my objective to deter nor support the use of these products. If you are still reading this article, I will assume that you already are or intend to use Trading – Leveraged Equities ETFs in your investment portfolio.

In my research, I have only included the ETFs that are considered by Morningstar to be “Trading – Leveraged Equity ETFs”. I also limited this research to ETFs that have existed for 10 years or longer. This narrowed down my list to 18 ETFs which are all 2X leveraged ETFs. Within the next few months, some of the older 3X ETFs will be 10 years old also. Personally, I am very comfortable using a 2X ETF in my long-term portfolio with some self-imposed limitations. But, I have no desire to use or advocated the use of 3X leveraged products for anything but trading instruments. Therefore, I will not be writing any articles on the long-term performance of 3X leveraged ETFs.

I have compared all 18 of these ETFs head-to-head using the back-testing tools at Portfolio Visualizer. The bottom 5 on this list could not even outperform an S&P 500 index fund over the last 10 years. The 3 best performing funds were able to more than double the CAGR (compounded annual growth rate) of an S&P 500 index fund over the last 11 years, but you would have suffered through drawdowns as high as 80% if held during the Great Recession of 2007-2009. This is the most important thing to take-to-heart in this article. If you want to hold these products long-term, you need to be prepared for 80%+ drawdowns. An additional caution would be that 8 of these ETFs are very thinly traded with daily volumes under 10k shares/day. ***** LTL & UPW are on the June 2018 ETF Deathwatch List *****

Above is a chart comparing the top 3 leveraged ETFs as compared to an S&P 500 index fund. Once again, please note the -80% drawdowns. That is significant, and it is real. Can you take that sort of butt whooping? Most investors cannot.

Next is a chart comparing the top 4 leveraged ETFs head-to-head. The top 4 ETFs were 2X leveraged versions of US Large Cap Growth, the Technology Sector, the Healthcare Sector and the Consumer Services Sector.

To better understand the top 4 Trading – Leveraged Equity ETFs, let’s look at their fund objectives:

QLD: ProShares Ultra QQQ seeks daily investment results, before fees and expenses, that correspond to two times (2x) the daily performance of the Nasdaq-100 Index®. Click here for the FACT SHEET.

ROM: ProShares Ultra Technology seeks daily investment results, before fees and expenses, that correspond to two times (2x) the daily performance of the Dow Jones U.S. TechnologySM Index. Click here for the FACT SHEET.

RXL: ProShares Ultra Health Care seeks daily investment results, before fees and expenses, that correspond to two times (2x) the daily performance of the Dow Jones U.S. Health CareSM Index. Click here for the FACT SHEET.

UCC: ProShares Ultra Consumer Services seeks daily investment results, before fees and expenses, that correspond to two times (2x) the daily performance of the Dow Jones U.S. Consumer ServicesSM Index. Click here for the FACT SHEET.

Now that we know how these ETFs are constructed, I’d like to share my personal, self-imposed rules for buying a 2X Leveraged Equity ETF. First, I will only begin buying shares of one of these ETFs when it is 20% or more below its’ 52-week high price. Once I begin to accumulate shares of said 2X ETF, I continue to buy shares if it continues to drop in price, preferably in 10% increments such as -20%, -30%, -40%, etc. I buy 1% lots of my total investable assets. So, if my total portfolio is valued at $200k then I would purchase $2k lots. I do not use stop losses and I continue to hold until I have a profit. Once I’m showing a profit, I do not sell all my shares; I just trim profits. This methodology works well for me, but it may not work well for you. You need to know yourself as an investor and as a trader. If you are prone to sell at a loss, I recommend that you cut your losses early; very early.

Thank you for taking time to read this article. If you found it useful, please share it with a friend.

Respectfully yours, Micah McDonald, aka the Deep Value ETF Accumulator

Disclosure: I am not a licensed investment advisor. I own some shares of QLD and intend to buy more in the future. Please perform your own due diligence or seek the advice of a Registered Investment Advisor prior to investing in any fund mentioned in this article.