Part #1: Understanding the pros and cons of leveraged products!! A picture is worth a thousand words!!

There are ETF products that come with leverage built-in, seeking 2x or even 3x the returns of the index or sector that they track. As such, they also charge higher fees (expense ratio). However, one should understand the substantial risks involved in such products!! 

Let's understand how it works! On a single trading session, the 3x leveraged products apply the leverage to obtain a 3x gain or a 3x loss. It's simple to understand right?

However, as you continue to hold over longer period of time, the compounding effect comes into play and the cumulative effect of applying gains and losses to a principal amount of capital over time becomes a clear risk for 3x leveraged products!!! 

As you know, there's up and downs in the market. The risk-reward ratio for holding 3x leveraged products diminished over time as shown below. Although the gains are significantly higher in the short-run, you will notice that eventually the gains became lower and the losses became higher over time (as shown below). Assuming the market remains flat in a highly volatile over a period of time (+/- 2.5% each day), like what we are observing now. You can see that the differences between normal ETFs vs 3x ETFs, the gain gets lower while the loss gets higher over time!! 

Hence, some key take-aways messages. 

1. 3x leveraged products amplify both your gains and losses by 3x in a single trading session

2. As you continue to hold longer, the gains will lower (less than 3x), the loss will also be higher (more than 3x). Just across a 2-week period of ups and downs (repeated 5x), the loss on normal ETF is 0.312% while the loss on 3x ETF is 2.78% (8.9x more). 

3. It can be useful when there's huge upcoming announcements, which might result in a huge surge/drop in price movement. 

**Leveraged product is more beneficial for intra-day trading and passive investors who are planning to hold their stocks forever should stick to the normal 1x ETFs instead. 

$Nasdaq 100 ETF(QQQ)$$Nasdaq100 Bear 3X ETF(SQQQ)$$Nasdaq100 Bull 3X ETF(TQQQ)$$Vanguard S&P 500 ETF(VOO)$$S&P 500 Bull 3X ETF(UPRO)$

@CaptainTiger@TigerStars@MillionaireTiger@Tiger_chat

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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.

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  • Papa Bear
    ·2022-09-04
    I suppose leveraged products are not for everyone [smile]
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  • loon0406
    ·2022-09-03
    good
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  • JCWOO
    ·2022-08-31
    Ok
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  • chubzchubx
    ·2022-08-30
    okayyy
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  • Jia Wei Lee
    ·2022-08-30
    👍
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