“Weapons of mass financial destruction.” That’s exactly how many investment pundits describe leveraged ETFs. And there’s good reason for that.
These ETFs which offer 2x, 3x – and in Europe 15x – the daily return of an index can seriously turn the good intentions of compounding into bad ones. That’s due to a concept called volatility decay. Various dips and drops to the leveraged index can cause catastrophic losses for portfolios.
To that end, ETFs like the Direxion Daily S&P 500 Bull 3X Shares (SPXL ) are only viewed as short-term trading positions.
But is that the right attitude toward leveraged ETFs? Are they really the “weapons of destruction” that people claim them to be? Some research says no. The truth is that a little leverage can go a long way to boosting overall portfolio returns over the long haul. The key is not overdoing it.
Learn here about the hidden risks and costs of ETFs.