7 Leveraged ETFs Every Day Trader Must Know

by on October 8, 2012 | ETFs Mentioned:

The proliferation of exchange-traded products has opened up the investing landscape to participants of all styles and experience levels. Virtually anyone with a personal brokerage account can now tap into any number of global asset classes; whether its domestic or foreign stocks, commodities, or bonds, there’s more than likely several ETFs covering the space. While many utilize ETFs as core building blocks in their portfolios thanks to the transparency and cost-efficiency benefits associated with the product wrapper, these instruments have also been embraced by active trader [see also 17 ETFs For Day Traders].

Day traders who value liquidity above all else have come to take advantage of ETFs as part of their strategy; these tools make it easy to move in and out of tactical, short-term positions across virtually any asset class. Leveraged ETFs in particular have caught the eye of seasoned investors who have learned to take advantage of these extremely powerful instruments. With innovation also comes complexity, however, and leveraged ETFs have gotten their fair share of bad-mouthing on Wall Street as many have been burned by these sophisticated products [see The Ultimate Guide To Leveraged ETFs].

The bottom line is that leveraged ETFs are appropriate for seasoned traders with shorter-term objectives. Leveraged ETFs can rake in monster gains if used correctly, although a thorough look under the hood is a must for anyone interested in these products; for those more familiar with the nuances associated with these tools, leveraged ETFs offer unparalleled opportunities [see Free Report: How To Pick The Right ETF Every Time].

As such, below we highlight seven of the most popular leveraged ETPs by trading volume that every day trader ought to have on their radar screen:

  1. Direxion Daily Small Cap Bear 3x Shares (TZA): Placing a leveraged inverse bet on U.S. small cap stocks is easy as buying into TZA. With an average daily trading volume topping 19 million shares, this ETF is a favorite among traders looking to profit from a “risk off” wave on Wall Street.
  2. ProShares UltraShort S&P 500 (SDS): With nearly $2 billion in assets under management, it’s fair to say that a number of longer-term investors are utilizing this leveraged inverse ETF as a hedge. Traders looking to short one of the most popular equity benchmarks in the world, the S&P 500 Index, can easily do so with SDS.
  3. Direxion Daily Financial Bear 3x Shares (FAZ): If the historically high volatility associated with the financials sector isn’t enough, then amplifying returns by -300% ought to appease even the most bearish, risk-hungry traders. With average daily trading volumes topping nine million shares, it’s quite clear that countless investors have embraced the opportunity to bet against this infamous asset class.
  4. VelocityShares 2x VIX Short-Term ETN (TVIX): Are you worried about a potential correction on Wall Street? TVIX is the ultimate tool for those looking to play volatility; this ETN can deliver stellar gains when markets turn sour on a dime and uncertainty permeates the market.
  5. ProShares UltraShort Barclays 20+ Year Treasury (TBT): Taking a leveraged inverse position in U.S. Treasuries may appeal to traders who have conviction that demand for this safe haven asset class will decline sharply for any number of reasons. Likewise, this ETF can head south very quickly if uncertainty in the equity market inspires a broad “risk off” trade.
  6. Direxion Daily Gold Miners Bull 3x (NUGT): Given the historical tendency for mining equities to exhibit higher volatility than the spot prices for the goods which they produce, NUGT can be an extremely powerful tool for those eager to bet on the price of gold. As such, traders should note that this ETF can catch tailwinds, and face headwinds, from both the equity and commodity markets.
  7. ProShares Ultra DJ-UBS Crude Oil (UCO): The oil futures market is infamous for its volatility and while this may scare away some, seasoned traders thrive on wild price swings. UCO trades well over two million shares daily and can be an effective instrument for those seeking amplified exposure to crude oil prices.

As always, investors of all experience levels are advised to use stop-loss orders and practice disciplined profit-taking techniques.

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Disclosure: No positions at time of writing.