Investors looking to diversify often turn to exchange traded funds (ETFs), which hold a basket of securities and trade like stocks, thus providing a speedy, efficient way to balance their portfolios. ETFs are an excellent way to track the S&P 500 Index, which has seen giant swings in recent months due to economic disruption related to the coronavirus pandemic. Investors seeking to profit from these swings may choose to use much riskier funds, called leveraged ETFs, which also track the S&P 500.
Leveraged ETFs comprise a small fraction of available ETFs—and with good reason. They are highly complex investment vehicles with a high-risk, high-cost structure that's suitable only for experienced investors with increased risk tolerance. Leveraged ETFs often employ financial derivatives and debt in an effort to achieve a 2% or 3% gain for each 1% gain in the S&P 500. The risk is that these ETFs also amplify losses when the S&P 500 declines. As a result, leveraged ETFs are most often used as short-term trading vehicles to minimize risk, with most investors exiting their positions in just a day or few days.
Below, we'll take a look at the best leveraged ETFs tracking the S&P 500 in terms of lowest fees and most liquidity. We have excluded funds with less than $50 million in assets under management (AUM) due to insufficient liquidity. All figures are as of April 8, 2020.
Because index-tracking ETFs follow the performance of their specific index, one of the biggest determinants of returns is how much funds charge in terms of fees, and the ProShares Ultra S&P 500 ETF has the lowest fees.
- Expense Ratio: 0.90%
- 1-Year Total Return: -23.4%
- Annual Dividend Yield: 0.78%
- 3-Month Average Daily Volume: 3,452,405
- Assets Under Management: $1.6 billion
- Inception Date: June 21, 2006
- Issuer: ProShares
This leveraged fund seeks to double the return of the S&P 500 for a single day (from one NAV calculation to the next) using stocks and derivatives.
Liquidity, defined by 3-month average daily trading volume, indicates how easy it will be to trade an ETF. High liquidity indicates that a large number of buyers and sellers are available to trade an ETF, and is especially important for investors who may want to unload their position amid a steep decline in the market. Liquidity also can translate to lower trading costs. For many investors who frequently trade, as is typically the case with leveraged funds, lower trading costs are important.
- Expense Ratio: 1.02%
- 1-Year Total Return: -43.7%
- Annual Dividend Yield: 1.99%
- 3-Month Average Daily Volume: 18,036,186
- Assets Under Management: $1.2 billion
- Inception Date: November 5, 2008
- Issuer: Direxion
This fund is a leveraged ETF from Direxion seeking to produce three times the return of the S&P 500 on a daily basis. Like SSO above, SPXL resets leverage on a daily basis, which creates compounding of returns when the ETF is held for several trading periods. The ETF is best utilized as a short-term investment for investors with a bullish outlook in the near term.