Research has shown that leveraged ETF products may not perform nearly as expected in these volatile markets, a quality that proves them as being suited only for very short-term trading.

ProShares states on its Web site:

“Each Short or Ultra ProShares ETF seeks a return that is either 3x, 2x, -1x, -2x or -3x of the return of an index or other benchmark (target) for a single day, as measured from one NAV calculation to the next. Due to the compounding of daily returns, ProShares’ returns over periods other than one day will likely differ in amount and possibly direction from the target return for the same period.

These effects may be more pronounced in funds with larger or inverse multiples and in funds with volatile benchmarks. Investors should monitor their ProShares holdings consistent with their strategies, as frequently as daily.”

While I sometimes use those products for short-term trades, I will never hold them for a long time.

Let me explain why.

Imagine you have an asset class with a price today of $100. To keep it simple, let’s also assume that the 2x long ETF also trades at $100 today.

From the table below, you can see that if the asset is going in one direction without a lot of volatility, you may actually gain more on the leveraged ETF than initially expected. While the asset class rose from $100 to $110 (+10%), the leveraged long ETF gained +20.89%, although we expected it to be +20% (two times the percentage gain of the asset class).

This is a favorable situation.


However, imagine we get a situation that works against us. We own a 2x short ETF, and the market keeps rising.

In this case, we are lucky as well, because we will "only" lose ($100-$82.42)/$100=17.58%, while we would expect a loss of -20%.


The two tables above show us that we might get a favorable situation with leveraged ETFs when volatility is very low.

NEXT: Volatile Conditions Cause Big Problems

But what happens when volatility is very high, as it has been recently?

Let’s assume again we have an asset class which is priced at $100, and a leveraged short ETF which is also priced at $100 today.

If the volatility is very high, we might end up losing a lot of money, as we can see from the table below. Even though the asset class ended up just where it began (at $100), our 2x short ETF has lost 7.94%!


Click to Enlarge

The same would be true if we have a 2x long ETF: even though the asset class ended up just where it began (at $100), we would have lost money with the leveraged long ETF.


NEXT: Real Market Example That Cost Traders Dearly

To give you an example, let’s have a look at the silver price, the ProShares Ultra Silver ETF (AGQ), and the ProShares Ultrashort Silver ETF (ZSL).

In the chart below, I set the initial value of each at $100, starting at January 1, 2011. The candlestick chart is the silver price, the green line is AGQ, and the purple line is ZSL.

As we can see, silver lost 12.25% this past year, so one would expect to have gained two times 12.25%, or 25.50%, with ZSL this past year then, right?

Wrong! ZSL lost 59.75% in the past year!

See related: Leveraged ETFs: Worst Investment Ever

In addition, one would expect to have lost two times 12.25%, or -25.50%, with AGQ this past year, right?

Wrong again! AGQ lost 46.79% this past year!


Click to Enlarge

It can also happen with the -1x ETFs, even though they do not leverage the price.

Let’s have a look at the S&P 500 (SPX) versus the ProShares Short S&P 500 (SH) since January 1, 2011.

While the S&P 500 gained 0.43% since the beginning of the year, SH lost 8.21%!

The correlation may be high, but it’s not perfect.


Click to Enlarge

That’s why you have to mind the leveraged ETF products. They can be used for very short-term trades (usually only a day or two), but don’t buy them to buy and hold unless you expect price to keep going in one direction. Even then, these variations may occur.

See related: The Leveraged ETF Safety Kit

The bottom line: stick to short-term trades in any leveraged ETF!

By Willem Weytjens of

Related Articles
  1. Economics

    India: Why it Might Pay to Be Bullish Right Now

    Many investors are bullish on India for all the right reasons. Does it present an investing opportunity?
  2. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  3. Investing Basics

    Building My Portfolio with BlackRock ETFs and Mutual Funds (ITOT, IXUS)

    Find out how to construct the ideal investment portfolio utilizing BlackRock's tools, resources and its popular low-cost exchange-traded funds (ETFs).
  4. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  5. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  6. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  7. Investing

    3 Things About International Investing and Currency

    As world monetary policy continues to diverge rocking bottom on interest rates while the Fed raises them, expect currencies to continue their bumpy ride.
  8. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
  9. Stock Analysis

    Analyzing Sprint Corp's Return on Equity (ROE) (S)

    Learn about Sprint's return on equity. Find out why its ROE is negative and how asset turnover and financial leverage impact ROE relative to Sprint's peers.
  10. Stock Analysis

    Why Alphabet is the Best of the 'FANGs' for 2016

    Alphabet just impressed the street, but is it the best FANG stock?
  1. Should mutual funds be subject to more regulation?

    Mutual funds, when compared to other types of pooled investments such as hedge funds, have very strict regulations. In fact, ... Read Full Answer >>
  2. Do ETFs pay capital gains?

    Exchange-traded funds (ETFs) can generate capital gains that are transferred to shareholders, typically once a year, triggering ... Read Full Answer >>
  3. How do real estate hedge funds work?

    A hedge fund is a type of investment vehicle and business structure that aggregates capital from multiple investors and invests ... Read Full Answer >>
  4. Are Vanguard ETFs commission-free?

    While some Vanguard exchange-traded funds (ETFs) are available commission-free from third-party brokers, a large portion ... Read Full Answer >>
  5. Do Vanguard ETFs require a minimum investment?

    Vanguard completely waives any U.S. dollar minimum amounts to buy its exchange-traded funds (ETFs), and the minimum ETF investment ... Read Full Answer >>
  6. Can mutual fund expense ratios be negative?

    Mutual fund expense ratios cannot be negative. An expense ratio is the sum total of all fees charged by an asset management ... Read Full Answer >>
Trading Center