Best leveraged S&P 500 ETF for the third quarter of 2021

Investors who want to diversify their holdings usually turn to exchange-traded funds (ETFs). These useful investment tools hold a basket of securities and trade like stocks, thereby providing a quick and effective option for investors who want to balance their investment portfolios. ETFs are also an excellent way to track the S&P 500 Index, which is a market capitalization weighted index of the 500 largest listed companies in the United States. Due to the economic disruption caused by the COVID-19 pandemic and other uncertainties, the S&P 500 has experienced high volatility in the past year. Investors seeking to profit from these volatility can choose to use a special and particularly risky product called a leveraged ETF, which also tracks the S&P 500 index.

Key points

  • The Standard & Poor’s 500 Index is a market capitalization weighted index of the 500 largest listed companies in the U.S.
  • The lowest cost S&P 500 ETF with 2x leverage is SPUU, and the most liquid S&P 500 ETF with 2x leverage is SSO.
  • The lowest cost 3x leveraged S&P 500 ETF is UPRO, and the most liquid 3x leveraged S&P 500 ETF is SPXL.
  • As of May 20, 2021, the S&P 500’s one-year total return was 42.4%. But investors should keep in mind that these ETFs are not designed to imitate long-term returns.

Leveraged ETFs account for only a small part of the available ETFs-for good reason. They are highly complex investment tools with high-risk, high-cost structures, and are only suitable for experienced investors with above-average risk tolerance. Leveraged ETFs usually use derivatives and debt to achieve 2 or 3 times the daily performance of the S&P 500 Index. The risk is that when the S&P 500 index falls, these ETFs will also magnify losses. Therefore, leveraged ETFs are most often used as short-term trading tools to minimize risk, and most investors will exit positions in a few days or less. They are not intended to be used as part of a long-term buy and hold investment portfolio, and new traders with lower risk tolerance should avoid using these types of funds.

Leveraged ETFs may be riskier investments than unlevered ETFs because they respond to daily changes in the underlying securities they represent, and losses may be magnified during adverse price changes. In addition, leveraged ETFs are designed to achieve a multiplier of their one-day returns, but you should not expect them to achieve long-term returns. For example, a 2x ETF may return 2% in a day when its benchmark rises by 1%, but you should not expect it to return 20% in a year when its benchmark rises by 10%. For more details, please refer to this SEC alert.

Below, we will look at the best 2x and 3x leveraged ETFs that track the S&P 500 in terms of lowest fees and highest liquidity, excluding inverse ETFs. The best 2x leveraged ETFs are SPUU and SSO. The best 3x leveraged ETFs are UPRO and SPXL. There is a 3x leveraged ETF. Although it does not track the S&P 500 Index, it does seek to trade some of its top beta stocks with 3x leverage. It is Direxion Daily S&P 500 High Beta Bull 3x Shares (HIBL). There are other leveraged ETFs that provide leveraged exposures or leverage factor strategies for specific industries. But the four funds examined below are the only funds that track a broader index, providing the same cap weighted exposure for all companies in the S&P 500 index. These funds are not ranked based on the returns of the past year because they are all tracking the same index and should have similar returns. They are also not ranked by long-term return performance, because the leverage multiples of leveraged funds are based on daily returns, rather than longer time periods. All figures below are from ETFdb.com, as of May 21, 2021, unless otherwise stated.

ETFs with very low assets under management (AUM) (less than US$50 million) are generally less liquid than large ETFs. This may result in higher transaction costs, thereby offsetting part of your investment income or increasing your losses.

Since the ETF that tracks the index will follow the performance of the index, one of the biggest determinants of long-term returns is the fees it charges.

  • Expense rate: 0.64%
  • Performance over one year: 94.3%
  • Annual dividend yield: 6.68%
  • 3-month average daily volume: 12,575
  • Assets under management: US$26.3 million
  • Date of Establishment: May 28, 2014
  • Publisher: Rafferty Asset Management

SPUU seeks a daily investment return (net of fees and expenses) of 200% of the performance of the S&P 500 Index. Investors should not expect the fund to provide twice the cumulative return of the S&P 500 Index over a period of more than one day. Investors with lower risk tolerance may consider other investments. SPUU holds iShares Core S&P 500 ETF (IVV) stocks to track the S&P 500 index and uses S&P 500 index swaps to gain leverage exposure to the index.

Liquidity indicates how easy it is to trade ETFs, and higher liquidity usually translates into lower transaction costs. For those who want to hold ETFs for a long time, transaction costs are not a big issue, but if you are interested in frequently trading ETFs, it is important to find highly liquid funds to minimize transaction costs.

  • 3-month average daily volume: 2,336,172
  • Performance over one year: 93.3%
  • Expense rate: 0.91%
  • Annual dividend yield: 0.14%
  • Assets under management: US$4 billion
  • Date of Establishment: June 21, 2006
  • Publisher: ProShares

SSO seeks a daily return on investment (before fees and expenses) that is twice the daily performance of the S&P 500 Index. The fund’s leverage is reset every day, so it produces compound returns when held for multiple periods. This ETF is designed for investors who have a high risk tolerance and are willing to monitor their holdings on a daily basis. SSO holds the stocks of companies that make up the S&P 500 Index and uses various swaps to provide leveraged exposure to the index.

Since the index tracking ETF will follow the performance of the index, one of the biggest determinants of long-term returns is the fees it charges.

  • Expense rate: 0.93%
  • Performance over one year: 157.1%
  • Annual dividend yield: 0.06%
  • 3-month average daily volume: 5,031,589
  • Assets under management: US$2.4 billion
  • Date of establishment: June 23, 2009
  • Publisher: ProShares

UPRO seeks a daily return on investment (deducting fees and expenses), which is three times the single-day S&P 500 return calculated from one Net Asset Value (NAV) to the next Net Asset Value (NAV) calculation. The fund’s leverage is reset every day, which will result in multiple periods of return compounding. The holdings of this ETF should be monitored on a daily basis and only used by investors with high risk tolerance. UPRO holds shares in companies that make up the S&P 500 index and uses various S&P 500 index swaps to provide leveraged exposure to the index.

Liquidity indicates how easy it is to trade ETFs, and higher liquidity usually translates into lower transaction costs. For those who want to hold ETFs for a long time, transaction costs are not a big issue, but if you are interested in frequently trading ETFs, it is important to find highly liquid funds to minimize transaction costs.

  • 3-month average daily volume: 7,159,723
  • Performance over one year: 156.3%
  • Expense rate: 1.01%
  • Annual dividend yield: 0.17%
  • Assets under management: US$2.2 billion
  • Date of Establishment: November 5, 2008
  • Publisher: Rafferty Asset Management

SPXL seeks a daily investment return (net of fees and expenses) of 300% of the performance of the S&P 500 Index. Investors should not expect the fund to provide three times the cumulative return of the S&P 500 index over a period of more than one day. Investors with low risk tolerance should avoid using this ETF. SPXL holds IVV stocks to track the S&P 500 index and uses S&P 500 index swaps to gain leverage exposure to the index.

The comments, opinions and analysis expressed here are for reference only and should not be regarded as personal investment advice or advice on investing in any securities or adopting any investment strategy. Although we believe that the information provided here is reliable, we do not guarantee its accuracy or completeness. The views and strategies described in our content may not be suitable for all investors. Due to the rapidly changing market and economic conditions, all comments, opinions and analyses contained in our content are presented on the date of publication and may change without notice. This material is not intended to provide a complete analysis of every important fact about any country, region, market, industry, investment or strategy.

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