Breaking News
Ad-Free Version. Upgrade your experience. Save up to 40% More details

Inverse And Leveraged ETFs For Potent Short-Term Trades

By (Tezcan Gecgil/ )ETFsNov 13, 2020 14:41
Inverse And Leveraged ETFs For Potent Short-Term Trades
By (Tezcan Gecgil/ )   |  Nov 13, 2020 14:41
Saved. See Saved Items.
This article has already been saved in your Saved Items

Looking for leverage long (bullish) or inverse short (bearish) exposure to daily returns on indices, equities, bonds, commodities or currencies? 

For experienced traders, leveraged and inverse exchange-traded funds (ETFs) can be appropriate vehicles to make daily trades. 

In previous posts we've explored leveraged and inverse ETFs in depth, emphasizing several important characteristics that are not typically found in traditional ETFs.

Today, we continue our discussion of leveraged and inverse funds and introduce another ETF that may be appropriate for experienced traders.

Daily Returns And Leveraging

These leveraged, inverse and inverse-leveraged ETFs may offer 2× or 3× (long exposure) or −1×, −2×, or −3× (short exposure) of the underlying index's daily returns. Options are also available on many leveraged ETFs.

The daily re-leveraging of these funds creates significant risk/return consequences for portfolios, especially if they are held longer than a single day. The daily re-balancing always follows the direction of the underlying index's daily performance. However, the hedging flows from long and short leveraged ETFs on the same index do not simply "offset" each other.

For example, let us assume a 2X (double-leveraged) ETF, where the initial net asset value (NAV) is $100.

The benchmark index also starts at 100. Then on day one, the index falls 10% (i.e., to 90). On day two, the index now increases by 10%, or goes up by 10% of 90. In other words, at the end of day two, the index stands at 99.

Intuitively, over this two-day period, the reader may expect the leveraged ETF to fall by twice as much as the index, or -2%. However, the fund declines by -4%.

When the leveraged fund doubles the index's 10% decline on day one, the fund's NAV falls to $80. The next day, it goes up by 20%, twice the gain of the index, to $96.

This daily re-leveraging via the use of derivative products will, in most cases, lead to value destruction for buy-and-hold investors. It is, therefore, crucial that non-professionals appreciate their characteristics before buying these ETFs.

For instance, as we write, the S&P 500 index is up by 10.58% year-to-date (YTD). On the other hand, the Direxion Daily S&P 500 Bear 1X Shares (NYSE:SPDNis down by 20.47%.

How about 2X leveraged and -2X inverse-leveraged funds? The Direxion Daily S&P 500 Bull 2X Shares (NYSE:SPUU) is up by 9.69% YTD. The ProShares UltraShort S&P500 (NYSE:SDS) is down by 44.37%.

Finally, the YTD numbers for 3X leveraged and -3X inverse-leveraged funds may help us see the picture better. The Direxion Daily S&P500 Bull 3X Shares (NYSE:SPXL) is down by 5.55% (that is not a misprint as it is a negative return YTD). The Direxion Daily S&P500 Bear 3X Shares (NYSE:SPXS) is down by 65.06%. Similarly, the ProShares UltraPro Short S&P500 (NYSE:SPXU) is also down by 65.18%. It is clear from these numbers that these funds are not meant to be held over the long term. 

With that said, here is our leveraged ETF for today.

Direxion Daily Semiconductor Bull 3X Shares

  • Current price: $328.82
  • 52-week range: $53.50 - $383.98
  • Expense ratio: 0.93%

The Direxion Daily Semiconductor Bull 3X Shares (NYSE:SOXL) aims to achieve daily investment results of 300% of the performance of the Philadelphia Semiconductor Index, which is up by 35.77% YTD. By comparison, SOXL is up by only 24.47%. Thus over the course of ten and a half months, targeted returns look different due to the compounding effects of the daily re-balancing.

SOXL Daily
SOXL Daily

A long-term investor whose objective is exposure to the benchmark Philadelphia Semiconductor Index would be better off by investing in a traditional ETF, such as the iShares PHLX Semiconductor ETF (NASDAQ:SOXXwhich is up by 35.79%. We have covered SOXX previously.

SOXL, on the other hand, is more appropriate for short-term traders who want to magnify returns on the benchmark index by 3x on a particular day. However, if those traders are on the wrong side of the bet, they would note that the value of SOXL declines quickly when the benchmark declines in value.

On a final note, those traders who are short-term bearish on semiconductors could use the Direxion Daily Semiconductor Bear 3X Shares (NYSE:SOXS) for daily directional bets. Since the start of the year, SOXS is down by 89.82%.

SOXS Daily
SOXS Daily

Inverse And Leveraged ETFs For Potent Short-Term Trades

Related Articles

Inverse And Leveraged ETFs For Potent Short-Term Trades

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at’s discretion.

Write your thoughts here
Are you sure you want to delete this chart?
Post also to:
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Are you sure you want to delete this chart?
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
Sign up with Email