The Survival Guide: Leveraged and inverse ETFs
On Thursday, major US index opened strong but gradually lost momentum as the session progressed.
Leveraged and inverse ETFs can be practical tools for navigating market volatility.
Stay tuned and supercharge purchasing power with CashBoost!
Market recap
Over the past week, the U.S. stock market has shown mixed performances. As of December 19th, the Dow Jones Industrial Average has fallen for ten consecutive trading days, marking its longest losing streak since 1974, with a cumulative decline of 2.58%. The S&P 500 Index dropped by 2.95%, while the Nasdaq Composite Index fell by 3.56%.
- Rate cut: Investors are recalibrating their expectations and trying to navigate the mixed signals from the Fed and economic data. Currently, the market anticipates fewer than two interest rate cuts throughout next year, a significant decrease from the nearly six cuts expected in early September.
- Big techs: Major tech stocks declined, with $Tesla Motors(TSLA)$ experiencing the largest drop. Especially, Tesla's shares fell over 8%, wiping out $131.5 billion from its market value overnight on Wednesday.
- Also big techs: Elon Musk recently joined Jeff Bezos and President-elect Donald Trump for a dinner at Mar-a-Lago. An eyewitness's account about the meeting has gone viral, saying that Elon entered "out of nowhere" making Jeff Bezos very uncomfortable. This gathering of influential figures has sparked a lot of interest, especially given the significant business and political implications.
Introducing Leveraged and Inverse ETFs
"Hakuna matata" is a Swahili phrase that translates to "no worries" or "there are no troubles" in English. It conveys a carefree attitude, encouraging people not to worry about things outside their control. The phrase gained international fame through Disney's 1994 classic animated film "The Lion King", where Timon and Pumbaa introduce the phrase to Simba in a catchy song, teaching him to live without worries.
Indeed, leveraged and inverse ETFs can be practical tools for navigating market volatility.
What They Are
• Leveraged ETFs aim to deliver multiples (e.g., 2x or 3x) of the daily performance of an index.
For example, if the $.SPX(.SPX)$ increases by 1%, a 2x leveraged ETF would aim to increase by 2%.
• Inverse ETFs seek to provide the opposite of the daily performance of an index.
For instance, if the $NASDAQ 100(NDX)$ falls by 1%, an inverse ETF might aim to rise by 1%.
Yes, there are lots of benefits
• Magnified Returns: Potential for higher returns in a short period if the market moves in the anticipated direction.
• Hedging: Inverse ETFs can be used to hedge against market downturns, providing a way to profit from falling markets.
But do pay attention to risks, too
• Volatility: The daily rebalancing and use of derivatives can lead to significant volatility and potential for large losses, especially if held for longer than one day.
• Compounding Effects: Over time, the compounding of daily returns can lead to performance that diverges from the expected multiple of the index's performance.
Tips for trading
Again, leveraged and inverse ETFs can be powerful tools for experienced investors, but they come with significant risks that need to be carefully managed. Mind the step.
Index ETFs
Designed to replicate and track the performance of a specific benchmark index, Index ETFs went viral among investors for their simplicity, cost-effectiveness, and ability to provide broad market exposure.
"Long" refers to ETFs that track the performance of the index, "Short" refers to ETFs that track the inverse performance of the index, and "2x Long" and "2x Short" as well as "3x Long" and "3x Short" refer to leveraged ETFs that amplify the index's performance.
For example, "2x Long" means the ETF will move twice as much as the index, "2x Short" will move twice as much but in the opposite direction. Similarly, "3x Long" and "3x Short" amplify the performance by three times.
YINN and YANG are leveraged and inverse ETFs offered by Direxion, designed to provide amplified exposure to the FTSE China 50 Index.
Single-stock ETFs (for Mag7)
The Magnificent Seven (Mag7) refers to seven of the largest and most influential tech companies: $Alphabet(GOOG)$ , $Amazon.com(AMZN)$ , $Apple(AAPL)$ , $Meta Platforms, Inc.(META)$ , $Microsoft(MSFT)$ , $NVIDIA(NVDA)$ , and $Tesla Motors(TSLA)$ . There are single-stock ETFs available for these companies, offering both leveraged and inverse exposure.
Treasury ETFs
Treasury ETFs are exchange-traded funds that invest in U.S. Treasury securities, such as Treasury bills, notes, and bonds.
ETFs like TMV (Direxion Daily 20+ Year Treasury Bear 3X Shares) and TYO (Direxion Daily 7-10 Year Treasury Bear 3X Shares) increase in value primarily due to rising Treasury yields.
When Treasury yields rise, the prices of long-term Treasury bonds fall. Since TMV is designed to move inversely to the price of these bonds, it increases in value when bond prices drop.
Social media has become a formidable force in the market. Actively using platforms like Reddit and X to find trading ideas can provide valuable insights into which sectors might become popular and where capital might flow overall. Additionally, joining communities like Telegram groups can be beneficial. The dynamic discussions can offer real-time insights into stocks or price trends, and engaging with experienced users within these groups can enhance the value of groupchats.
Boost purchasing power and trading ideas with CashBoost!
Stay tuned. Comment, like and subscribe to @Tiger_Contra.
[End]
Open a CBA today and enjoy access to a trading limit of up to SGD 20,000 with upcoming 0-commission, unlimited trading on SG, HK, and US stocks, as well as ETFs. Find out more here.
Other helpful links:
Join telegram to win SGD10
Disclaimer: Investing carries risk. This is not financial advice. The above content should not be regarded as an offer, recommendation, or solicitation on acquiring or disposing of any financial products, any associated discussions, comments, or posts by author or other users should not be considered as such either. It is solely for general information purpose only, which does not consider your own investment objectives, financial situations or needs. TTM assumes no responsibility or warranty for the accuracy and completeness of the information, investors should do their own research and may seek professional advice before investing.
