Because index-tracking ETFs track the index’s performance, one of the most important predictors of long-term returns—if not the most important—is how much it charges in fees.
SPUU aims to achieve daily investment returns of 200 percent of the S&P 500 Index, before fees and expenses. For durations longer than a single day, investors should not expect this fund to generate two times the cumulative return of the S&P 500. Investors with a low risk tolerance may wish to look into other options.
SPUU tracks the S&P 500 using shares of the iShares Core S&P 500 ETF (IVV) and leveraged exposure to the index with S&P 500 Index swaps.
Is SSO a wise investment?
Investing in SSO can provide the leverage discussed in the research, as well as potentially higher long-term returns than the S&P 500, as assessed by the SPDR S&P 500 ETF Trust (SPY). SSO’s annual expenditure ratio is 0.91 percent, which can cut into returns significantly.
What exactly is the SDS ETF?
This ETF provides 2x daily short leverage to the S&P 500 Index, making it a useful instrument for investors who have a pessimistic short-term outlook for large-cap US equities. SDS is a great tool for educated investors, but individuals with a limited risk tolerance or a buy-and-hold strategy should avoid it.
Is it possible to lose money with ETFs?
While there are many wonderful new ETFs on the market, anything promising a free lunch should be avoided. Examine the marketing materials carefully, make an effort to thoroughly comprehend the underlying index’s strategy, and be skeptical of any backtested returns.
The amount of money invested in an ETF should be inversely proportionate to the amount of press it receives, according to the rule of thumb. That new ETF for Social Media, 3-D Printing, and Machine Learning? It isn’t appropriate for the majority of your portfolio.
8) Risk of Overcrowding in the Market
The “hot new thing risk” is linked to the “packed trade risk.” Frequently, ETFs will uncover hidden gems in the financial markets, such as investments that provide significant value to investors. A good example is bank loans. Most investors had never heard of bank loans until a few years ago; today, bank-loan ETFs are worth more than $10 billion.
That’s fantastic… but keep in mind that as money pours in, an asset’s appeal may dwindle. Furthermore, some of these new asset types have liquidity restrictions. Valuations may be affected if money rushes out.
That’s not to say that bank loans, emerging market debt, low-volatility techniques, or anything else should be avoided. Just keep in mind while you’re buying: if this asset wasn’t fundamental to your portfolio a year ago, it should still be on the periphery today.
9) The Risk of Trading ETFs
You can’t always buy an ETF with no transaction expenses, unlike mutual funds. An ETF, like any other stock, has a spread that can range from a penny to hundreds of dollars. Spreads can also change over time, being narrow one day and broad the next. Worse, an ETF’s liquidity can be superficial: the ETF may trade one penny wide for the first 100 shares, but you may have to pay a quarter spread to sell 10,000 shares rapidly.
Trading fees can drastically deplete your profits. Before you buy an ETF, learn about its liquidity and always trade with limit orders.
10) The Risk of a Broken ETF
ETFs, for the most part, do exactly what they’re designed to do: they happily track their indexes and trade close to their net asset value. However, if something in the ETF fails, prices can spiral out of control.
It’s not always the ETF’s fault. The Egyptian Stock Exchange was shut down for several weeks during the Arab Spring. The only diversified, publicly traded option to guess on where the Egyptian market would open after things calmed down was through the Market Vectors Egypt ETF (EGPT | F-57). Western investors were very positive during the closure, bidding the ETF up considerably from where the market was prior to the revolution. When Egypt reopened, however, the market was essentially flat, and the ETF’s value plunged. Investors were burned, but it wasn’t the ETF’s responsibility.
We’ve seen this happen with ETNs and commodity ETFs when the product has stopped issuing new shares for various reasons. These funds can trade at huge premiums, and if you acquire one at a significant premium, you should expect to lose money when you sell it.
ETFs, on the whole, do what they say they’re going to do, and they do it well. However, to claim that there are no dangers is to deny reality. Make sure you finish your homework.
Can you lose more money in leveraged ETFs than you put in?
No, you can’t lose more money in a leveraged ETF than you put in. One of the key reasons why leveraged ETFs are less dangerous than traditional leveraged trading, such as buying on margin or short-selling stocks, is because of this.
Is SSO a solid exchange-traded fund (ETF)?
This ETF provides 2x daily long leverage to the S&P 500 Index, making it a valuable instrument for investors with a bullish short-term outlook for large-cap stocks. SSO is a great instrument for sophisticated investors, but individuals with a limited risk tolerance or a buy-and-hold strategy should avoid it.
Is Queensland a good long-term investment?
During bull markets, 2X ETFs such as SSO and QLD are attractive long-term investments because their time decay is minor compared to their potential upside returns. If you bought into the 2020 market downturn, holding a leveraged 2X ETF for another year and letting the profit run is a reasonable approach.
Is it wise to invest in SDS?
SDS seeks daily investment returns that are twice (200 percent) the inverse (opposite) of the S&P 500 Index’s daily performance. This has not been a good investment during the last five years. This fund has been a terrible investment since its beginning.
